A.K.A. BRANDS HOLDING CORP. (AKA) Q2 2026 Earnings Call Transcript

Greetings, and welcome to the a.k.a. Brands Holding Corp. Second Quarter Fiscal 2026 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce K.C. White, General Counsel. Please go ahead.

Good afternoon. Thank you for joining a.k.a. Brands to discuss our second quarter 2026. Before we get started, I'd like to remind you of the company's safe harbor language. Management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including when we refer to expectations, projections and other characterizations of future events, including guidance and underlying assumptions. Any forward-looking statement provided during this call, including projections for future performance, is based on management's expectations as of today. We undertake no obligation to update forward-looking statements, except as required by applicable law. These statements are neither promises nor guarantees and are subject to known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statement. For a 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 it over to Ciaran.

Good afternoon, and thank you for joining us to discuss our second quarter 2026 results. In the second quarter, we generated net sales of $160.1 million, essentially flat to the prior year, while driving adjusted EBITDA growth of 16% year-over-year to $8.7 million, further validating that the structural improvements we've made across the business are enabling strong profit flow-through. We delivered on our growth expectations in both the U.S. and Rest of World geographies with net sales up 2% and 51%, respectively. The Australia and New Zealand region was the outlier with net sales there contracted approximately 13%, pressured by a challenging macro backdrop and a tough prior year comparison from the clearance of non-go-forward goods. Importantly, Q3 to date momentum has accelerated in all regions with overall net sales growth in the high single digits alongside healthy margins, giving us continued confidence in our outlook for the second half of the year. We're seeing clear proof points of success across both our women's and men's businesses, reinforcing that our strategic initiatives are resonating with customers and positioning us well for long-term growth. As I highlighted on our Q1 call, a.k.a. Brands is a fundamentally repositioned operating model anchored on profitability and durability. Our second quarter results are a clear reflection of that transformation with strong profit flow-through, driving adjusted EBITDA growth in the mid-teens. Our performance this quarter was driven by the expanded distribution of our brands across stores, wholesale and marketplace, the strengthening of our operational foundation and continued financial discipline across the business. We're off to a solid start in Q3, and I remain confident that 2026 will serve as another meaningful proof point that our strategy is working and our business is on a stronger trajectory. Reiterating our strategy, we've continued building out our omnichannel model beyond our direct-to-consumer routes. Princess Polly now operates 13 U.S. stores plus our first two Australian locations with more openings planned in both markets this year. As we announced this morning, Culture Kings is also expanding its store footprint in the U.S. with a signed lease for a new store in Puerto Rico and final negotiations for a major metropolitan opening later this year. At the same time, we are expanding our wholesale and marketplace partnerships, which are exceeding expectations, expanding brand awareness, attracting new customers and creating incremental growth opportunities. And behind the scenes, we've laid the operational groundwork for this expansion. Inventory has been well managed, driving more full price sell-through and improved inventory turns are giving us greater flexibility to invest in growth. That discipline has also enabled Culture Kings and mnml to further evolve towards a test and repeat merchandising model, which has been a multiyear initiative that is now showing up clearly in our margin improvement. As I previously mentioned, we also completed a full overhaul of our sourcing network in 2025, diversifying across geographies and vendors. That gives us a more resilient supply chain, one built to support test and repeat and to handle the current trade environment as we keep growing. Together, these initiatives have strengthened our financial model. We ended the quarter with our strongest balance sheet since becoming a public company, reducing our inventory by 14% and our debt by 8% versus the prior year and we ended the period with net leverage of 3.37x. This provides us with increased financial flexibility to continue investing in both growth and profitability. Looking ahead, three priorities remain: driving direct-to-consumer growth through differentiated product and marketing, expanding reach through retail, wholesale and marketplace and continuing to sharpen our operating model. We're also scaling our AI investment, already seeing early gains in imagery, marketing efficiency and inventory with more margin benefit expected over time. Turning now to our brand highlights. Princess Polly, our largest brand, delivered another strong quarter. The brand's expanding omnichannel presence continued to extend its reach beyond the successful direct-to-consumer model, driving growth across both new and returning customers with stores, wholesale and marketplace each making meaningful contributions. Princess Polly's 1,000 square foot pop-up at the Grove in Los Angeles, which opened in May, far exceeded our expectations, and we're excited to have made the Grove a permanent location. Princess Polly is on track to open four additional stores in the U.S. and one in Australia, all by year-end. Looking ahead to 2027, we plan to open as many as 10 new Princess Polly stores with five leases already executed in major trade areas, including Charlotte, Boca Raton, Nashville, Burlington and Jacksonville. Longer term, we see the potential for a minimum of 100 Princess Polly stores in the U.S. alone, up from a current fleet of 13 stores. As I mentioned, our sales growth of more than 50% in the Rest of World was another bright spot in the quarter. The largest driver was the U.K. distribution center that launched in March, which is delivering the customer experience we envisioned. The two-day delivery window is transforming conversion with momentum compounding week-over-week. This confirms for us the tremendous growth opportunity we have for Princess Polly in the U.K. and internationally, which we will look to capitalize on over the coming years. From a merchandising perspective, Princess Polly enters the back-to-school selling season with an evolved approach that builds on its test and repeat model. Beginning this month and informed by strong customer feedback, the brand expanded its offering with deeper buys in core seasonal styles across denim, sweats and tops. This is designed to capitalize on peak selling throughout the season, both in stores and online. Test and repeat remains the core of Princess Polly's assortment strategy. What we're doing is layering in evergreen programs season after season in the categories where customer demand has proven durable. Taken together, these results underscore why global expansion of Princess Polly's addressable market remains a key strategic priority. Our smaller women's brand, Petal & Pup, continued to expand its wholesale and marketplace distribution in Q2. Nordstrom remains a productive partner with strong unit velocity and sell-through across dresses and casual styles in-store and online. Macy's was a notable Q2 callout and remains a strong growth partner with tops now the number one performing category on the platform, reinforcing the strength of our expanding separates offering. Petal & Pup continues to build distribution of its expanding lifestyle assortment by adding more specialty wholesale partners. During this quarter, it will take another important step, taking part in the specialty retail trade show Magic in Las Vegas, the largest wholesale trade show in the U.S. Looking ahead for Petal & Pup, we've intentionally pulled forward our product flow with fall launching in August and holiday in October, four to six weeks earlier than last year. This gives both our direct-to-consumer and wholesale partners a longer selling window heading into the back half. Petal & Pup is well positioned for the second half, and I'm confident in the white space runway and long-term trajectory of the brand. Turning now to our streetwear brands. Over the past several years, we strengthened the foundation of the streetwear business, and we're now applying the same omnichannel playbook that has driven success across our women's brands. We're expanding beyond direct-to-consumer through stores and wholesale while continuing to execute our disciplined full price test and repeat merchandising strategy. Customers are responding to improved product and a less promotional approach, driving strong sell-through. While sales were not at the level we expected for Culture Kings in Australia in the quarter, the business contributed meaningfully to the overall gross margin expansion. Culture Kings' experiential retail model, together with its portfolio of in-house brands that we have now transitioned to a test and repeat model, including mnml, Loiter and Carré, provide a strong foundation as we expand across new channels. Mnml's recent performance has been among the strongest we've seen from the brand with several key products achieving exceptional success in TikTok Shop and mnml now ranking as a top five brand in the men's category on the platform. Loiter will lean further into collaborations with their recent WrestleMania partnership and the upcoming Sonic the Hedgehog collaboration serving as great examples of how differentiated the Loiter brand is. And finally, in Q2, Carré launched their first global collaboration with Coca-Cola centered around the World Cup, and we're excited by Carré's product pipeline and future collaborations. The team's continued work expanding the in-house brand portfolio, curating third-party brands such as New Era, Adidas and ASICS and driving the strategic transition towards a more full-price test and repeat model sets the stage for meaningful profitable growth ahead. Marketing remains a key strength for Culture Kings. Brand activations, creator partnerships and exclusive collaborations continue to drive traffic, customer engagement and cultural relevance, reinforcing the foundation for profitable growth. Our men's brands are now on a solid footing to follow a similar path to our women's business, expanding reach through brick-and-mortar retail, wholesale partnerships and marketplaces. We're still early in this journey, but I'm confident that we're in a strong position to meaningfully grow our men's total addressable market. As I've mentioned, we signed a new Culture Kings store lease in Puerto Rico, and we're in the final negotiations for another opening in a major metropolitan market. We expect to have both new stores open in Q4 2026. These will be Culture Kings' first new U.S. store openings since 2022 and mark an important milestone in the brand's next phase of growth. New stores will draw on the learnings from our highest performing Australia locations as well as our highly productive and profitable Las Vegas flagship. In closing, our second quarter results reinforce that the operating model we've built is delivering. We posted double-digit adjusted EBITDA growth, positive operating cash flow year-to-date and our strongest balance sheet position since our IPO. The work we've put into go-to-market strategy, sourcing, inventory and channel expansion is translating directly into profit flow-through. Q3 to date trends have been strong, and we continue to make progress building out our omnichannel model, well underway in women's, just beginning in men's. Taken together, that gives me real confidence in both the back half of the year and the long-term opportunity across our brand portfolio. I want to thank our teams for their continued hard work and commitment. Our results are a direct reflection on their dedication to our brands and our customers. Before I turn it over to Kevin, I want to take a moment to note a change to our Board. Ilene Eskenazi has stepped down after many years of dedicated service. On behalf of the entire company, I want to thank her for her contributions and counsel over time. I'm delighted to welcome Carrie Cassidy to the Board. Carrie brings deep expertise in talent and organizational leadership, having served as Chief People Officer of Restoration Hardware and held senior leadership roles at Levi Strauss, Barclays and First Data and currently serves on the Board of Thuma and Zio Mezzetta. As we scale our brands portfolio, her perspective on leadership and organizational performance will be a real asset to this Board. We're excited to have her on board. With that, I'll turn it over to Kevin.

Thanks, Ciaran. For the second quarter, net sales and adjusted EBITDA were in line with our expectations, with adjusted EBITDA growing 16%, reflecting continued execution against our full year plan. Let me walk you through the drivers. Net sales were $160.1 million for the second quarter compared to $160.5 million a year ago. On a constant currency basis, net sales declined 5.3%. By region, net sales in the U.S. increased 2.1% to $110.7 million. Net sales in the Rest of World increased 50.5% to $9.6 million, driven in part by the opening of our new U.K. distribution center. In the Australia and New Zealand region, net sales declined 13% to $39.8 million, where we're seeing consumers under increased pressure from the macro environment. Total orders were $2.04 million, down 0.5% year-over-year. Trailing 12-month active customers, excluding wholesale, increased 4.4% to $4.31 million compared to $4.13 million a year ago. And average order value was $78, consistent with last year. Gross margin increased 360 basis points to 61.1%. Let me provide some additional detail on our Q2 gross margin. The reported 61.1% rate did not include any IEPA refunds. Of the 360 basis points of year-over-year expansion, approximately 240 basis points related to lower year-over-year tariffs. The remaining expansion of 120 basis points was driven largely by our streetwear brands, a direct result of higher full price selling, partially offset by higher air freight costs. Our outlook, which I'll cover in a moment, assumes a gross margin of approximately 59% for Q3 and reflects current tariff rates and elevated air freight costs. Moving to selling expenses. Selling expenses were $47.8 million compared to $45.4 million a year ago. The increase was driven by higher in-store selling expenses as we continue to increase our retail footprint. As a percentage of net sales, selling expenses were 29.9% compared to 28.3% a year ago. Marketing expenses were $21.4 million compared to $19.9 million a year ago and 13.3% of net sales. General and administrative expenses were $27.5 million, flat with a year ago. Adjusted EBITDA increased 16% to $8.7 million in the second quarter, our highest quarterly adjusted EBITDA since Q2 2022, driven primarily by higher gross margin. This compared to $7.5 million a year ago. Our adjusted EBITDA margin grew 80 basis points to 5.5%. Turning to the balance sheet. We ended the quarter with $21.1 million in cash and cash equivalents compared to $23.1 million a year ago. During the quarter, we received substantially all of the $25.8 million in expected IEPA tariff refunds, which is reflected in our operating cash flow. Total debt at the end of the quarter declined 8.1% to $99.9 million from $108.7 million a year ago as we continue to focus on reducing our leverage and strengthening our balance sheet. Net leverage declined to 3.37x at the end of the quarter compared to 3.5x a year ago. We ended the quarter in a healthy position with $79.9 million in inventory, down $13.6 million from a year ago. Turning now to our outlook. We are pleased with our strong start to Q3 with net sales up high single digits and are confident in the strategic initiatives in place as we head into the back half of the year. We are reiterating our guidance for fiscal 2026. We continue to expect net sales to be between $625 million to $635 million and adjusted EBITDA of between $30 million to $32 million. For the third quarter, we expect net sales to be between $160 million and $164 million. As I mentioned, we expect gross margin of approximately 59% and adjusted EBITDA of between $8 million and $8.5 million in the third quarter. For modeling purposes, we expect to incur a one-time charge of approximately $3 million in Q3 related to a planned distribution center relocation that will be reported in selling expenses but excluded from adjusted EBITDA. For the full year, we anticipate fiscal 2026 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, an effective tax rate of negative 10%, CapEx between $18 million to $20 million and weighted average diluted share count of approximately 11 million. In closing, we are pleased with our execution this quarter against our strategic plan. We believe we are well positioned to build on this momentum and continue delivering long-term value for our stockholders. With that, we'll open the call for questions.

Our first question is from Ryan Meyers with Lake Street.

Congrats on the strong quarter. Just thinking about the unchanged revenue guidance, obviously, you guys are expecting to see some pretty significant momentum here in the second half of the year. I know you faced some easier compares from last year's second half. Walk us through what you're seeing in the business right now. Is demand picking up? Is it a continuation of what you saw in the first half of the year, so we can understand the strength in the second half of the year?

Thanks, Ryan. We're now up high single digits through Q3. For the U.S. and Rest of World, we started seeing improving comps and performance as we went through Q2. The U.S. is running double digits quarter-to-date. Compared to this time last year, our inventory is in a much better position and inventory flows are healthier. We had challenges last year as we transitioned our supply chain. We also have more wholesale partners, more marketplace distribution points, which continues to expand. From a store perspective, we will end Q3 with seven more stores than we had last year, which drives a nice comp. One standout last quarter was the Rest of World performance, particularly the opening of the U.K. distribution center, with Rest of World up over 50% in the quarter. There's strong momentum across the business; we are back at double-digit growth in the U.S. and high single digits overall.

Right. Thinking longer term, you guys have said Princess Polly is targeting at least 100 stores. What are you seeing from the current store base in terms of productivity and paybacks that gives you confidence in that target longer term?

With 13 doors opened so far, we're still early in the opportunity. We're planning to open at least 10 more next year and see the potential for 100 stores in the U.S. What we're seeing now is that stores introduce us to new customers and create a halo effect for online. We see really strong productivity. We're modeling mall paybacks of two years or less, and across the fleet we're seeing better performance than that. We're evolving our assortment to be more evergreen, which helps stores, and we're excited to see how they perform in the back-to-school season with denim, fleece and tops driving strength.

Our next question is from Eric Beder with SCC Research.

Congratulations. Let's talk about Culture Kings. With the new stores coming into Puerto Rico and a metropolitan market, how can you compare and contrast those with what the stores were in Las Vegas and how you're looking to leverage those learnings?

We're excited to open two more Culture Kings stores in the U.S. before year-end: one in Puerto Rico and one in another major metropolitan area. The new stores will be roughly 4,500 to 6,000 square feet, so smaller than Vegas and without some of the large features of the Vegas flagship. We'll apply learnings from the new Brisbane store in Australia and Vegas. The stores will continue to focus on headwear and footwear as core components, while leading with our first-party brands. Mnml, Loiter, St. Martha and American Thrift are performing strongly. The newer product we're bringing in is contributing meaningful gross margin expansion, and in Australia and the U.S. that product is growing double digits, with even greater growth from a gross margin dollar perspective. It will be great to have more doors and showcase the Culture Kings brand.

On Australia, you opened another Princess Polly store. How are Princess Polly stores doing there and what is the potential? Second, what are you seeing economically that's pausing Australian growth after a long period of positives?

Princess Polly opened its second Gold Coast store after the first in Bondi Beach last year, and performance has been phenomenal. Traffic was strong at opening and continued to perform well. Princess Polly is well established in Australia and customers appreciate the ability to see and touch product. Longer term, we could see up to about ten Princess Polly stores in Australia. Culture Kings has eight stores in Australia. We expect to remain predominantly direct-to-consumer there but could open a handful of Princess Polly stores. Regarding the region, we had been seeing growth, with the region up 3.8% in Q1 and Culture Kings roughly flat on a comp basis. We did see pressure in June and July from macro factors such as fuel and rate hikes, which other retailers have cited similarly. Bright spots include positive comps in the region in July, showing the progress made in resetting the business, getting the right product in, and moving past older product. The newer product is showing double-digit comps and higher gross margin, which supports our confidence that the business will get back on track and gives us confidence to open new U.S. stores for the brand.

Our next question is from Randy Konik with Jefferies.

With the announcement that Princess Polly is targeting at least 100 stores, it would be helpful to understand how you think about long-term penetration by channel: e-commerce versus stores versus wholesale across the broader portfolio. Can you give high-level thoughts on margin contribution by channel so we can model long-term operating margins for the company?

Over the last couple of years at the brand and group level, we've leaned into direct-to-consumer while opening new channels. We've learned from stores, wholesale, marketplace and TikTok over the last 12 months. Each channel has slightly different economics and operating models from gross margin and selling and marketing perspectives. There's a huge opportunity and we're early in it. If we had 100 Princess Polly stores today, direct-to-consumer would still be larger than stores, and wholesale/marketplace would be materially smaller than both but still meaningful. So longer term I expect a mix where direct-to-consumer is the majority, stores next, and wholesale/marketplace behind that. A similar mix would apply across streetwear and Petal & Pup, though timing will differ by brand.

When I look at the cash flow statement in the press release, it looks like debt paydown exceeded CapEx on a six-month basis. Give perspective on how you're thinking about capital deployment to grow Princess Polly units versus debt paydown. How do you balance CapEx for stores and reducing leverage?

We finished the quarter in a strong balance sheet position. The IEPA cash came in during the quarter, which was beneficial. Debt is down year-over-year 8% and leverage is down sequentially and year-over-year to 3.3x. Bringing down debt remains a priority as we generate cash. Looking back over the last 18 months, which smooths the tariff noise, we've generated $35 million of operating cash, deployed $25 million to CapEx and $10 million to debt reduction. That shows a track record of funding growth while reducing debt. We will continue to pursue growth and debt reduction in a healthy way from a balance sheet perspective.

I'd add that it's encouraging to see the progress on EBITDA: 16% growth year-over-year and over 35% for the six-month period versus last year. We haven't seen the full benefit of the streetwear improvements yet. Gross margin improvements have been evident over recent quarters, and as customers continue to react to new product, we'll see that translate into increasing EBITDA, then comp growth. When that ramps to the level we expect, we'll continue to increase EBITDA, cash flow and our ability to invest in growth opportunities.

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

Nice to see the progress. On Princess Polly and the 100-store opportunity, how many can you open per year? As you open more, is there leverage to reduce cost-to-open such as fixtures? Are there different store sizes for different neighborhoods? For Culture Kings, what learnings from Princess Polly apply to opening U.S. stores? And how do you think about the margin structure of retail stores versus wholesale?

We've learned a lot and have extensive data on customer locations, frequency and white space, which helps us target the right mall locations and opportunities. We'll focus on the right spots with the right economics rather than chasing a specific store count. We expect to open about 10 Princess Polly stores next year, a 50% increase year-over-year, and we can accelerate as we refine our approach. We're refining store layout and fixtures across the first 13 openings, which should lower opening costs and speed. Learnings from Princess Polly will be applied to Culture Kings so they don't need to rebuild systems, tools or processes, allowing more efficient and quicker openings. From a margin perspective, stores typically have materially higher gross margin due to full-price retail, but higher selling and some marketing expenses. Blended, EBITDA before G&A is similar across channels, though stores capture the full retail margin.

Ladies and gentlemen, this concludes our question-and-answer session and does conclude today's conference as well. You may disconnect your lines at this time. Thank you again for your participation, and have a wonderful day.