Item 7. Management’s Discussion and Analysis
ITEM 7. 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 consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Our fiscal year ends on December 31.
Overview
a.k.a. Brands is a portfolio of next-generation fashion brands for the next generation of consumers. We seek to leverage our industry expertise and operational synergies to accelerate our brands so they can grow faster, reach broader audiences, achieve greater scale and enhance their profitability. We believe we are disrupting the status quo and pioneering a new approach to fashion.
a.k.a. was founded with a focus on Millennial and Gen Z audiences who primarily find inspiration for fashion on social media. We have since built a portfolio of next-generation brands with distinct fashion offerings and consumer followings:
• Princess Polly, a 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.
• Petal & Pup, a fashion brand offering an assortment of trendy, flattering and feminine styles and dresses for special occasions. The brand targets female customers typically in their twenties or thirties, with more than 70% of customers between the ages of 25 and 34.
• Culture Kings, a 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.
• mnml, a streetwear brand that offers competitively priced, on-trend wardrobe staples. The brand targets male consumers between the ages of 18 and 35.
In 2024 as compared to 2023, we:
• Increased net sales to $574.7 million from $546.3 million , representing 5% year-over-year growth
• Increased U.S. net sales to $368.8 million from $315.5 million , representing 17% year-over-year growth
• Expanded gross margin by 200 basis points to 57% from 55%
• Reduced our net loss to $26.0 million from $98.9 million
• Increased Adjusted EBITDA to $23.3 million from $13.8 million , representing 69% year-over-year growth
• Attracted 4.1 million active customers, an increase of 9% from the prior year
• Received approximately 7.3 million orders, an increase of 7% from the prior year
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:
Year Ended December 31,
(in millions, other than dollar figures)
2024 2023 2022
Active customers
4.07 3.72 3.78
Average order value
$ 79 $ 80 $ 82
Number of orders
7.32 6.85 7.42
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Active Customers
We view the number of active customers as a key indicator of our growth, our value proposition, consumer awareness of our brand, and our customer’s 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 as net sales in a given period divided by the total orders placed in that period. Average order value may fluctuate as we expand into new categories, geographies or channels, or as our assortment changes.
Number of Orders
We define the number of orders as the total number of orders placed by our customers, prior to product returns, across our platform or in our stores in any given period. An order is counted on the day the customer places the order. We consider the number of orders to be a key indicator of our ability to attract and retain customers, as well as an indicator of the desirability of our products.
Key Financial Metrics
The following table sets forth our key financial metrics prepared in accordance with GAAP and certain non-GAAP financial metrics for each period presented:
Year Ended December 31,
(dollars in thousands)
2024 2023 2022
Gross margin
57 % 55 % 55%
Net loss
$ (25,990) $ (98,886) $ (176,697)
Net loss margin
(5 %) (18 %) (29%)
Adjusted EBITDA
$ 23,309 $ 13,790 $ 31,872
Adjusted EBITDA margin
4 % 3 % 5 %
Net cash provided by (used in) operating activities
$ 669 $ 33,426 $ (319)
Free Cash Flow
$ (10,923) $ 27,456 $ (20,065)
Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow are non-GAAP measures. See “Non-GAAP Financial Measures” below for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow and their reconciliation to net income (loss), net income (loss) margin and net cash provided by (used in) operating activities, respectively.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we monitor the following supplemental non-GAAP financial measures to evaluate our operating performance, identify trends, formulate financial projections and make strategic decisions on a consolidated basis. Accordingly, we believe that non-GAAP financial information may provide useful supplemental information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. The non-GAAP financial measures are presented for supplemental informational purposes only. They should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: interest and other expense; benefit from or provision for income taxes; depreciation and amortization expense; equity-based compensation expense; inventory step-up amortization expense; distribution center relocation costs; transaction costs; costs related to severance from headcount reductions; goodwill and intangible asset impairment; sales tax penalties; insured losses, net of any recoveries; and one-time or non-recurring items. We calculate Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA does not represent net income (loss) or cash flow from or used in operating activities as it is defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA has other limitations as an analytical tool when compared to the use of net income (loss), which is the most directly comparable GAAP financial measure, including that Adjusted EBITDA does not reflect:
• the interest or other expense we incur;
• the provision for or benefit from income tax;
• any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges;
• any transaction or debt extinguishment costs;
• any costs to establish or relocate distribution centers;
• any costs related to severance from headcount reductions;
• any impairment of goodwill or intangible assets;
• any costs related to sales tax penalties;
• any insured losses, net of recoveries;
• any non-routine legal matters;
• any amortization expense associated with fair value adjustments from purchase price accounting, including intangibles or inventory step-up; and
• the cost of compensation we provide to our employees in the form of equity awards.
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The following table reflects a reconciliation of Adjusted EBITDA to net loss and Adjusted EBITDA margin to net loss margin, the most directly comparable financial measures prepared in accordance with GAAP:
Year Ended December 31,
(dollars in thousands)
2024 2023 2022
Net loss
$ (25,990) $ (98,886) $ (176,697)
Add (deduct):
Total other expense, net 11,340 13,556 8,575
Provision for (benefit from) income tax
4,329 1,921 (3,917)
Depreciation and amortization expense 17,597 19,141 20,348
Equity-based compensation expense 7,980 7,640 6,730
Inventory step-up amortization expense — — 707
Distribution center relocation costs
2,101 — 1,302
Transaction costs — — 140
Goodwill impairment — 68,524 173,786
Non-routine legal matters 1
4,498 396 —
Non-routine items 2
1,454 1,498 898
Adjusted EBITDA $ 23,309 $ 13,790 $ 31,872
Net loss margin
(5 %) (18 %) (29 %)
Adjusted EBITDA margin 4 % 3 % 5 %
1 Non-routine legal matters include a $2.0 million accrual in 2024 in connection with the legal matter described in Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K.
2 Non-routine items include severance from headcount reductions; sales tax penalties; and insured losses, net of recoveries.
Free Cash Flow
We calculate Free Cash Flow as net cash provided by (used in) operating activities reduced by purchases of property and equipment. Management believes Free Cash Flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash. There are limitations related to the use of Free Cash Flow as an analytical tool, including that other companies may calculate Free Cash Flow differently, which reduces its usefulness as a comparative measure, and Free Cash Flow does not reflect our future contractual commitments nor does it represent the total residual cash flow for a given period.
The following table presents a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable financial measure prepared in accordance with GAAP:
Year Ended December 31,
(dollars in thousands)
2024 2023 2022
Net cash provided by (used in) operating activities
$ 669 $ 33,426 $ (319)
Less: purchases of property and equipment
(11,592) (5,970) (19,746)
Free Cash Flow
$ (10,923) $ 27,456 $ (20,065)
Our Free Cash Flow has fluctuated over time primarily as a result of timing of inventory purchases, purchases of property and equipment and fluctuations in earnings.
For the year ended December 31, 2024 , net cash provided by operating activities decreased by $32.8 million compared to net cash provided by operating activities for the year ended December 31, 2023 . This was attributable primarily to more cash used to purchase inventory in 2024, as compared to 2023, to support growth in the U.S., partially offset by the timing of payments.
For the year ended December 31, 2024 , Free Cash Flow decreased by $38.4 million compared to Free Cash Flow for the year ended December 31, 2023 . This was attributable primarily to more cash used to purchase inventory in 2024 and additional capital expenditures related to new stores, as compared to 2023, to support growth in the U.S., partially offset by the timing of payments.
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Factors Affecting Our Performance
Macroeconomic Environment
The macroeconomic environment in which we operate impacts consumer behavior and may have a significant impact on our business. While positive conditions in the economy generally promote customer spending on our sites and in our stores, any economic weakness can result in a reduction of customer spending and have a significant negative impact on our results of operations. Macroeconomic factors that could cause significant negative impacts on our results of operations include, but are not limited to: inflationary pressures on consumers globally and on our supply chain; elevated interest rates; employment rates; business conditions; changes in the housing market; changes in stock markets; adverse developments affecting the financial services industry; the availability of credit, both for us and for our customers; foreign currency exchange rates; fuel, energy and raw materials costs; supply chain challenges; wars and geopolitical tensions; and the effects of tariffs.
Brand Awareness
Our ability to promote our brands and maintain brand awareness and loyalty is critical to our success. We have a significant opportunity to continue to grow awareness and loyalty to our brands through word of mouth, brand marketing, performance marketing, wholesale and marketplace opportunities, and increased store openings in key locations. We plan to continue to invest in performance marketing and increase our investment in brand awareness across our brands to drive our future growth. Failure to successfully promote our brands and maintain brand awareness would have an adverse impact to our operating results.
Customer Acquisition
To continue to grow our business profitably, we intend to acquire new customers and retain our existing customers at a reasonable cost. Our methods to acquire customers have evolved and will need to continue evolving in response to changes in shopping behaviors, content consumption, costs to advertise and developments in technology. Competition for social media and influencer-based marketing channels continues to increase, making it more difficult to differentiate ourselves and cost-effectively acquire customers. Failure to continue attracting customers efficiently and profitably would adversely impact our profitability and operating results.
Customer Retention
Our results are driven not only by the ability of our brands to acquire customers, but also by their ability to retain customers and encourage repeat purchases. We monitor retention across our entire customer base and use loyalty programs to attempt to retain customers. Failure to retain customers would adversely impact our profitability and operating results.
Inventory Management
Our test, repeat & clear inventory strategy, utilized fully by our Princess Polly and Petal & Pup brands, consists of smaller initial inventory purchases followed by analysis of real-time data and customer feedback, which allows us to identify and quickly re-order best sellers. While our initial orders are limited in size and, therefore, limit financial risk, we nonetheless purchase inventory in anticipation of future demand and therefore are exposed to potential shifts in customer preferences and price sensitivity over time. We have begun to adopt this strategy, with initial success, at our Culture Kings and mnml brands as well.
Investment in our Operations and Infrastructure
We will continue to invest in our operations to facilitate further growth of our business. We intend to invest in headcount, inventory, stores, fulfillment, logistics, and software and data capabilities, including best-in-class third-party providers in order to improve customer experience, expand into more markets and drive operational efficiencies. While we are disciplined in our capital spending and believe we can generate positive returns on our investments over the long term, we cannot guarantee that increased spending on these investments will be cost effective or result in future growth in our customer base.
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Foreign Currency Rate Fluctuations
Our international operations have provided and are expected to continue to provide a significant portion of our Company’s net sales and operating income. As a result, our Company’s net sales and operating income will continue to be affected by changes in the U.S. dollar against international currencies, predominantly against the Australian dollar. 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 in this Annual Report on Form 10-K 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, 2023 , which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. Such disclosure throughout our Management’s Discussion and Analysis of Financial Condition and Results of Operations will be described as “on a constant currency basis.” Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company in the future.
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Results of Operations
The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Year Ended December 31,
(in thousands)
2024 2023 2022
Net sales $ 574,697 $ 546,258 $ 611,738
Cost of sales 247,192 245,978 274,491
Gross profit 327,505 300,280 337,247
Operating expenses:
Selling 161,852 149,307 166,070
Marketing 74,710 68,907 66,730
General and administrative 101,264 96,951 102,700
Goodwill impairment — 68,524 173,786
Total operating expenses 337,826 383,689 509,286
Loss from operations
(10,321) (83,409) (172,039)
Other expense, net:
Interest expense (10,296) (11,165) (7,043)
Other expense (1,044) (2,391) (1,532)
Total other expense, net
(11,340) (13,556) (8,575)
Loss before income taxes
(21,661) (96,965) (180,614)
(Provision for) benefit from income tax
(4,329) (1,921) 3,917
Net loss
$ (25,990) $ (98,886) $ (176,697)
Year Ended December 31,
2024 2023 2022
Net sales
100 % 100 % 100 %
Cost of sales
43 % 45 % 45 %
Gross profit
57 % 55 % 55 %
Operating expenses:
Selling
28 % 27 % 27 %
Marketing
13 % 13 % 11 %
General and administrative
18 % 18 % 17 %
Goodwill impairment — % 13 % 28 %
Total operating expenses
59 % 70 % 83 %
Loss from operations
(2 %) (15 %) (28 %)
Other expense, net:
Interest expense (2 %) (2%) (1%)
Other expense — % —% —%
Total other expense, net
(2 %) (2%) (1%)
Loss before income taxes
(4 %) (18 %) (30 %)
(Provision for) benefit from income tax
(1 %) —% 1%
Net loss
(5 %) (18 %) (29 %)
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Comparison of the Years Ended December 31, 2024 and 2023
Net Sales
Years Ended December 31,
2024 2023
Net sales
$ 574,697 $ 546,258
Net sales increased by $28.4 million, or 5%, in 2024 compared to 2023. The overall increase in net sales was primarily driven by an 7% increase in the number of orders we processed in 2024 compared to 2023, partially offset by a decrease in our average order value of 1%, from $80 in 2023 to $79 in 2024. The increase in the number of orders was primarily driven by growth in the U.S. across all sales channels. On a constant currency basis, net sales and average order value for 2024 would have increased 7% and decreased 1%, respectively, as compared to 2023.
Cost of Sales
Years Ended December 31,
2024 2023
Cost of sales
$ 247,192 $ 245,978
Percent of net sales
43 % 45 %
Cost of sales increased by $1.2 million in 2024 compared to 2023, due to a 7% increase in the total number of orders in 2024, as compared to 2023, and the effect of growing wholesale and marketplace initiatives, mostly offset by more full price selling and an improved inventory position. The decrease in cost of sales as a percentage of net sales was primarily due to the impact from more full price selling and improved inventory position, partially offset by the effect of growing wholesale initiatives, which have lower gross margins.
Gross Profit
Years Ended December 31,
2024 2023
Gross profit $ 327,505 $ 300,280
Gross margin 57 % 55 %
Gross profit increased by $27.2 million, or 9%, in 2024 compared to 2023. This increase was primarily driven by the 5% increase in net sales in 2024, as compared to 2023, and an increase in gross margin. Gross margin increased primarily due to the impact from more full price selling and improved inventory position, partially offset by the effect of growing wholesale initiatives, which have lower gross margins.
Selling Expenses
Years Ended December 31,
2024 2023
Selling
$ 161,852 $ 149,307
Percent of net sales
28 % 27 %
Selling expenses increased by $12.5 million, or 8%, in 2024 compared to 2023. This increase was driven by the 5% increase in net sales, as well as the opening of additional stores and the impact from growing marketplace initiatives in 2024 compared to 2023. The increase in selling expenses as a percentage of net sales was primarily due to the opening of additional stores and the impact from growing marketplace initiatives.
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Marketing Expenses
Years Ended December 31,
2024 2023
Marketing
$ 74,710 $ 68,907
Percent of net sales
13 % 13 %
Marketing expenses increased by $5.8 million, or 8%, in 2024 compared to 2023. Marketing expenses as a percentage of net sales for 2024 was flat compared to 2023.
General and Administrative Expenses
Years Ended December 31,
2024 2023
General and administrative $ 101,264 $ 96,951
Percent of net sales 18 % 18 %
General and administrative expenses increased by $4.3 million, or 4%, in 2024 compared to 2023. The increase was primarily driven by a $6.2 million increase in wages and incentive compensation expense, a $2.0 million accrual for a legal matter, and a $2.1 million increase in other non-routine legal matters. Partially offsetting these increases was a $1.8 million decrease in intangible amortization, a $1.6 million decrease in sales tax penalties and interest, a $1.4 million decrease in professional and administrative fees and a $1.1 million decrease in insurance costs. General and administrative expenses as a percentage of net sales for 2024 was flat compared to 2023.
Goodwill Impairment
Years Ended December 31,
2024 2023
Goodwill impairment $ — $ 68,524
Percent of net sales — % 13 %
There was no goodwill impairment in 2024. Goodwill impairment in 2023 was recognized on the goodwill recorded from the acquisitions of the Culture Kings and Petal & Pup reporting units.
Other Expense, net
Years Ended December 31,
2024 2023
Other expense, net:
Interest expense $ (10,296) $ (11,165)
Other expense (1,044) (2,391)
Total other expense, net
$ (11,340) $ (13,556)
Percent of net sales
(2 %) (2 %)
Other expense, net decreased by $2.2 million, or 16%, in 2024 compared to 2023, primarily due to lower interest expense from a reduction in our long-term balance, the impact of changes in foreign currency exchange rates and the loss recognized on the sale of the Rebdolls reporting unit in 2023.
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Provision for Income Tax
Years Ended December 31,
2024 2023
Provision for income tax
$ (4,329) $ (1,921)
Percent of net sales (1 %) — %
Effective tax rate (20 %) (2 %)
Provision for income tax increased by $2.4 million, or 125%, in 2024 compared to 2023. This increase was primarily due to limitations in interest expense deduction in Australia and the additional valuation allowance on the net deferred tax assets in the U.S.
Comparison of the Years Ended December 31, 2023 and 2022
Net Sales
Years Ended December 31,
2023 2022
Net sales
$ 546,258 $ 611,738
Net sales decreased by $65.5 million, or 11%, in 2023 compared to 2022. The overall decrease in net sales was primarily driven by an 8% decrease in the number of orders we processed in 2023 compared to 2022, which drove a decrease in net sales of $49.7 million, and a decrease in our average order value of 2%, from $82 in 2022 to $80 in 2023, which drove a decrease in net sales of $15.8 million. The decrease in the number of orders and average order value were primarily due to adverse macroeconomic conditions in Australia and New Zealand. On a constant currency basis, net sales and average order value for 2023 would have decreased 9% and 1%, respectively, as compared to 2022.
Cost of Sales
Years Ended December 31,
2023 2022
Cost of sales
$ 245,978 $ 274,491
Percent of net sales
45 % 45 %
Cost of sales decreased by $28.5 million, or 10%, in 2023 compared to 2022. This decrease was primarily driven by an 8% decrease in the total number of orders in 2023, as compared to 2022, a decrease in our average order value of 2% and lower inbound air freight costs, partially offset by a higher merchandise return rate. While cost of sales as a percent of net sales was flat in 2023 compared to 2022, cost of sales as a percent of net sales would have increased due to targeted discounting in Culture Kings Australia and a higher merchandise return rate if not offset by lower inbound air freight costs.
Gross Profit
Years Ended December 31,
2023 2022
Gross profit $ 300,280 $ 337,247
Gross margin 55 % 55 %
Gross profit decreased by $37.0 million, or 11%, in 2023 compared to 2022. This decrease was primarily driven by the 11% decrease in net sales, as well as a higher merchandise return rate. These impacts were partially offset by lower air freight expense. While gross margin was flat in 2023 compared to 2022, gross margin would have decreased due to targeted discounting in Culture Kings Australia and a higher merchandise return rate, if not offset by lower inbound air freight costs.
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Selling Expenses
Years Ended December 31,
2023 2022
Selling
$ 149,307 $ 166,070
Percent of net sales
27 % 27 %
Selling expenses decreased by $16.8 million, or 10%, in 2023 compared to 2022. This decrease was driven by the 8% decrease in the number of orders shipped in 2023 compared to 2022, and operational efficiencies in distribution, fulfillment and outbound shipping.
Marketing Expenses
Years Ended December 31,
2023 2022
Marketing
$ 68,907 $ 66,730
Percent of net sales
13 % 11 %
Marketing expenses increased by $2.2 million, or 3%, in 2023 compared to 2022. The increase in marketing expenses was driven by additional marketing spend due to reduced marketing effectiveness, particularly in Australia. The increase in marketing expenses as a percentage of net sales was primarily due to lower net sales in 2023 compared to 2022.
General and Administrative Expenses
Years Ended December 31,
2023 2022
General and administrative $ 96,951 $ 102,700
Percent of net sales 18 % 17 %
General and administrative expenses decreased by $5.7 million, or 6%, in 2023 compared to 2022. The decrease was primarily driven by a $2.7 million decrease in intangible amortization, a $2.1 million decrease in wages and benefits and a $1.5 million decrease in insurance costs. A $1.2 million increase in professional fees partially offset these decreases. The increase in general and administrative expenses as a percentage of net sales resulted primarily from lower net sales in 2023 compared to 2022.
Goodwill Impairment
Years Ended December 31,
2023 2022
Goodwill impairment $ 68,524 $ 173,786
Percent of net sales 13 % 28 %
Goodwill impairment decreased by $105.3 million, or 61%, in 2023 compared to 2022. Goodwill impairment in 2023 was recognized on the goodwill recorded from the acquisitions of the Culture Kings and Petal & Pup reporting units. Goodwill impairment in 2022 was recognized on the goodwill recorded from the acquisitions of the Culture Kings and Rebdolls reporting units. In August 2023, due to elevated interest rates and unfavorable demand in Australia, we reduced our earnings forecasts and expectations for the Culture Kings and Petal & Pup reporting units. This reduction was identified as a triggering event and a subsequent quantitative test concluded that the carrying value of the Culture Kings and Petal & Pup reporting units exceeded their fair values as of August 31, 2023. As of December 31, 2023, the goodwill related to Culture Kings was fully impaired, while $11.3 million of the goodwill related to Petal & Pup remained on our balance sheet.
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Other Expense, net
Years Ended December 31,
2023 2022
Other expense, net
Interest expense $ (11,165) $ (7,043)
Other expense (2,391) (1,532)
Total other expense, net $ (13,556) $ (8,575)
Percent of net sales
(2 %) (1 %)
Other expense, net increased by $5.0 million in 2023 compared to 2022 primarily due to $4.1 million in additional interest expense from rising interest rates on our variable rate debt.
(Provision for) Benefit from Income Tax
Years Ended December 31,
2023 2022
(Provision for) benefit from income tax
$ (1,921) $ 3,917
Percent of net sales — % 1 %
Effective tax rate 2 % (2 %)
Provision for income tax increased by $5.8 million, or 149%, in 2023 compared to 2022. This increase was primarily due to the increase in the valuation allowance on the net deferred tax assets in Australia.
Seasonality
Due to our operations being concentrated in two distinct geographies (Australia and the United States), our business has experienced seasonality that may differ from that of other retailers. The first quarter has historically been our lowest sales quarter, and that trend is likely to continue as we continue to expand into the U.S. market.
The following table presents quarterly net sales as a percentage of total annual net sales:
Years Ended December 31,
2024
2023
2022
First quarter
20 % 22 % 24 %
Second quarter
26 % 25 % 26 %
Third quarter
26 % 26 % 25 %
Fourth quarter
28 % 27 % 25 %
Total
100 % 100 % 100 %
Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can significantly impact, both positively and negatively, the level of demand by customers for our products. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
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Liquidity and Capital Resources
As of December 31, 2024, our principal sources of liquidity were cash and cash equivalents totaling $24.2 million, our revolving line of credit and our term loan accordion provision.
As of December 31, 2024, most of our cash was held for working capital purposes. We have historically financed our operations and capital expenditures primarily through cash flows generated by operations, the incurrence of debt and through the issuance of equity. We believe that our existing cash, together with cash generated from operations and available borrowing capacity under our credit facilities and lines of credit, will be sufficient to meet our anticipated cash needs for the next 12 months. We believe that cash generated from ongoing operations and continued access to debt markets will be sufficient to satisfy our cash requirements beyond 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow funds under our credit facility or raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section of this Annual Report on Form 10-K captioned “Risk Factors.” We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. The inability to raise capital if needed would adversely affect our ability to achieve our business objectives.
Senior Secured Credit Facility
In connection with our initial public offering of common stock in September 2021 (the “IPO”), we entered into a senior secured credit facility comprised of a $100.0 million term loan and a $50.0 million revolving line of credit, with an option of up to $50.0 million in an additional term loan through an accordion provision. We used borrowings under this credit facility, together with a portion of the proceeds from the IPO, to repay our previous debt in full. As of December 31, 2024, we owed a combined $89.1 million in term loan and accordion borrowings, as well as $23.3 million borrowed under the revolving line of credit. The term loan requires us to make amortized annual payments of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year with the balance of the loan due at maturity in September 2026. Borrowings under the term loan accrue interest at Term SOFR, as defined in the credit agreement for the senior secured credit facility (the “Credit Agreement”), plus an applicable margin dependent upon our net leverage ratio, as defined in the Credit Agreement. The revolving line of credit, when used, also accrues interest at Term SOFR plus an applicable margin dependent upon our net leverage ratio. The highest interest rates under the Credit Agreement for both the term loan and the revolving line of credit occur at a net leverage ratio of greater than 2.75x, yielding an interest rate of a benchmark rate plus 3.25%. The accordion provision allows us to borrow additional amounts of term loan at terms to be agreed upon at the time of issuance, but on substantially the same basis as the original term loan. As of December 31, 2024, principal payments of our term loan and accordion for the next twelve months are anticipated to total $6.3 million.
Under the senior secured credit facility, we are subject to certain financial covenant ratios and certain annual mandatory prepayment terms based on excess cash flows, as defined in the Credit Agreement, based on our net leverage ratio. If we are unable to comply with certain financial covenant ratios, which include provisions that are not precisely defined and are subject to interpretation, and terms requiring mandatory prepayment based on a percentage of excess cash flows, our long-term liquidity position may be adversely impacted. Furthermore, the variable interest rates associated with our senior secured credit facility could result in interest payments that are higher than anticipated. We were in compliance with all debt covenants as of December 31, 2024, and expect to be in compliance beyond the next 12 months, although our ability to meet these financial ratios and tests can be affected by the interpretation of certain provisions in our Credit Agreement, macro economic factors and the seasonality of our business, which is more concentrated in the third and fourth fiscal quarters .
Refer to Note 7, “Debt,” in the notes to our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our senior secured credit facility.
Material Cash Requirements
Our material cash requirements include operating lease obligations and inventory purchase commitments.
We have lease arrangements for certain equipment and facilities, primarily office locations, warehouse facilities and retail stores. Most of our property, equipment and software have been purchased with cash. As of December 31, 2024, our future minimum payments under non-cancelable operating leases totaled $92.9 million, with $13.2 million payable within the next 12 months.
While we routinely contract for the purchase of inventory from vendors, we have no material purchase obligations outstanding with any vendors or third parties.
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Additionally, we plan to incur capital expenditures of approximately $12.0 to $14.0 million in 2025. This reflects the planned opening of 6-8 new stores, as well as investments in infrastructure and technology.
Historical Cash Flows
Year Ended December 31,
2024 2023 2022
Net cash provided by (used in) operating activities
$ 669 $ 33,426 $ (319)
Net cash used in investing activities
(11,594) (6,031) (25,314)
Net cash provided by (used in) financing activities
15,506 (52,829) 33,260
Net Cash Provided by (Used in) Operating Activities
Cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation, amortization, equity-based compensation, the effect of changes in working capital and other activities.
In 2024, net cash provided by operating activities decreased $32.8 million. This was attributable primarily to more cash used to purchase inventory in 2024, as compared to 2023, to support growth in the U.S., partially offset by the timing of payments.
In 2023, net cash provided by operating activities increased $33.7 million. This was attributable primarily to a decrease in inventory compared to 2022, which was driven by reduced inventory buying and sell-through of aged inventory, partially offset by lower earnings .
Net Cash Used in Investing Activities
Our primary investing activities have consisted of acquisitions to support our overall business growth, and investments in fulfillment centers, stores and internally developed software to support our infrastructure. Purchases of property and equipment may vary from period to period due to timing of the expansion of our operations.
In 2024, net cash used in investing activities increased $5.6 million. This was attributable to additional capital expenditures related to new stores.
In 2023, net cash used in investing activities decreased $19.3 million. This was attributable to a reduction in purchases of property and equipment and the cash paid from holdbacks in the prior period related to the mnml acquisition. The purchases of property and equipment in the prior year were primarily due to the build-out of the Culture Kings Las Vegas store .
Net Cash Provided by (Used in) Financing Activities
Our financing activities have historically consisted of cash proceeds from borrowings, cash used to pay down borrowings, cash received from the sale of our common stock in the IPO and cash used to repurchase shares of our common stock.
In 2024, net cash provided by financing activities increased $68.3 million as compared to net cash used in financing activities in 2023. This was primarily attributable to the combined $50.7 million in principal payments, net of borrowings, on our senior secured credit facility in 2023 and the $17.9 million in borrowings, net of repayments, under our senior secured credit facility in 2024.
In 2023, net cash used in financing activities increased $86.1 million as compared to net cash provided by financing activities in 2022. This was primarily attributable to the combined $50.7 million in principal payments, net of borrowings, on our senior secured credit facility in 2023 and the $34.4 million in borrowings, net of repayments, under our senior secured credit facility in 2022 .
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Share Repurchase Program
On May 25, 2023, our board of directors approved the Share Repurchase Program, authorizing us to repurchase up to $2.0 million of shares of our common stock. Subsequently, in 2023, our board of directors approved an additional repurchase capacity under the Share Repurchase Program of $3.0 million of shares of our common stock. The timing of any of our repurchases and the actual number of shares repurchased are at our discretion, and, in deciding when to repurchase shares and the amount of shares to repurchase, we will consider available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a Rule 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. The Share Repurchase Program may be suspended or discontinued at any time and has no expiration date. All repurchased shares under the Share Repurchase Program will be retired.
During the year ended December 31, 2024, we repurchased 131,618 shares of our common stock under the Share Repurchase Program for $1.5 million, at an average price of $11.53 per share.
Critical Accounting Estimates
We believe that the following accounting estimates involve a high degree of judgment and complexity. Refer to Note 2, “Significant Accounting Policies,” in the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a description of our significant accounting policies. The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition
Revenue is primarily derived from the sale of apparel merchandise through our online websites, stores, third-party marketplaces, wholesale partnerships and, when applicable, shipping revenue. We determine revenue recognition through the following steps in accordance with the Financial Accounting Standards Board’s Revenue from Contracts with Customers (Topic 606) :
• identification of the contract, or contracts, with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the contract; and
• recognition of revenue when, or as, we satisfy a performance obligation.
Revenue is recognized upon shipment when control of the promised goods or services is transferred to our customers, or at point of sale for purchases in our stores, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our revenue is reported net of sales returns and discounts. We estimate our liability for product returns based on historical return trends and an evaluation of current economic and market conditions, all of which have a degree of uncertainty. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of goods sold. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur. We have not made any material changes to our assumptions included in our calculations of expected customer refund activity during the year ended December 31, 2024.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using an average cost method. Cost of inventory includes import duties and other taxes and transport and handling costs to deliver the inventory to our distribution centers or stores. We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume, the expected sales price and the cost of making the sale when evaluating the value of our inventory. If the sales volume or sales price of specific products declines, additional write-downs may be required. We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the year ended December 31, 2024.
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Goodwill and Impairment of Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset.
Goodwill is tested for impairment at least annually, in the fourth quarter and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment test is performed at the reporting unit level, which is generally at the level of or one level below an operating segment. A qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in the excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. Annually, as of October 31, a quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit’s forecasted future cash flows that are discounted to present value using the reporting unit’s weighted average cost of capital. The market-based approach is based on the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.
Based on the range of estimated fair values developed from the income and market-based methods, we determine the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, we calculate the impairment loss as the difference between the carrying value of the reporting unit and the estimated fair value.
The income-based fair value methodology requires management’s assumptions and judgments regarding economic conditions in the markets in which we operate and conditions in the capital markets, many of which are outside of management’s control. At the reporting unit level, fair value estimation requires management’s assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit’s strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management’s estimates and assumptions regarding:
• Annual cash flows, on a debt-free basis, arising from future revenues and earnings, changes in working capital, capital spending and income taxes for at least an 8-year forecast period.
• A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.
• A discount rate that reflects the risks inherent in realizing the forecasted cash flows.
Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of our reporting units.
The carrying value of definite-lived intangible assets is reviewed whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using the discounted cash flow method. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value.
As discussed above, significant judgment and estimates are required in assessing impairment of goodwill and intangible assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows and determining appropriate discount rates. Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
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In August 2023, due to elevated interest rates and unfavorable demand in Australia, we reduced our forecasts and expectations for the Culture Kings and Petal & Pup reporting units. This reduction was identified as a triggering event and a subsequent quantitative test concluded that the carrying value of the Culture Kings and Petal & Pup reporting units exceeded their fair values as of August 31, 2023. As a result, we recorded a non-cash goodwill impairment charge of $68.5 million during the third quarter of 2023. As of December 31, 2023, $11.3 million of goodwill related to Petal & Pup remained on our balance sheet, while the goodwill related to Culture Kings was fully impaired. Additionally, as of December 31, 2024, the estimated fair value of the mnml reporting unit exceeded the carrying value by 11.2%, and the carrying value of the related goodwill was $30.0 million. No impairment was identified as part of the annual goodwill impairment test conducted in 2024.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are recorded net on the balance sheet. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. This assessment involves uncertainty and judgment. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We have not made any material changes to our assumptions and estimates related to our income tax positions during the year ended December 31, 2024.
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