a.k.a. Brands - Q1 2023

Transcript

Operator (participant)

Greetings. Welcome to a.k.a. Brands Holdings Corp.'s first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Emily Schwartz. Emily, you may now begin.

Emily Schwartz (Head of Investor Relations and Communications)

Good afternoon. Thank you for joining a.k.a. Brands' first quarter 2023 conference call to discuss the results released this afternoon, which can be found on our website at ir.aka-brands.com. With me on the call today is Ciaran Long, Interim Chief Executive Officer and Chief Financial Officer. Before we get started, I'd like to remind you of the company's safe harbor language. Management may make forward-looking statements which 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 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 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 earnings release furnished to the SEC and available on our website. The call will also contain certain numbers presented on a pro forma basis, which includes the impact of Culture Kings as if we had owned it for all periods and comparable periods described. With that, I'll turn the call over to Ciaran.

Ciaran Long (Interim CEO and CFO)

Thanks, Emily. Good afternoon, everyone, and thanks for joining the call today. Our first quarter results exceeded our expectations on both the top and bottom lines, driven by solid execution across the brands and our continued focus on managing the business prudently. We delivered net sales of $120 million compared to our original expectations of between $113 million and $116 million. Importantly, we continue to balance growth and profit, and I'm proud that we delivered $2.2 million of adjusted EBITDA, which also exceeded our original expectations. We made great progress against our strategic initiatives in the quarter, and I'm also really proud of the efficiency improvements we made to our operations. A key highlight for the quarter was our diligent approach to managing our inventory.

Notably, we ended the quarter with $112 million in inventory, which is down 11% since the end of December 2022, and down 7% from the same period last year. Another highlight was that we continued to reduce our debt levels. We paid off over $11 million of debt in the first quarter and paid off another $10 million subsequent to quarter end. This brings our current debt levels down to $122 million, down from $144 million from the end of fiscal 2022. We remain focused on strengthening our balance sheets and plan to continue to pay down our debt through the remainder of the year.

I want to thank our teams for their hard work and execution to deliver a strong start to the year with first quarter performance that exceeded our expectations on both the top and bottom lines. We are laser-focused on growing awareness with Gen Z and millennial customers. On a trailing 12-month basis, we serve 3.6 million customers. We're confident that there is great potential for our brands to gain market share in the US and globally. We believe the key to building durable next generation brands is to be everywhere our customers are. Our brands have mastered building authentic relationships directly with customers and providing great experiences. While direct-to-consumer remains our priority and the main source of our growth, as announced last quarter, we are testing new ways to broaden our reach through select wholesale partnerships, marketplaces, and physical stores.

Let me share some updates on our strategic initiatives and omnichannel tests, and then I'll go into greater detail on our financials. Starting with Princess Polly, our largest brand. Princess Polly continues to be a top teen fashion website in the U.S., according to Piper Sandler's Taking Stock With Teens survey. We're confident in the global potential for this brand. As mentioned, the newness is back at our brands, and we're particularly excited by the newness of Princess Polly. As a reminder, Princess Polly uses a test and repeat merchandise approach, and they're able to get hundreds of new styles on their site and socials within a matter of weeks. In the first quarter, they launched nearly 3,000 new styles and are seeing strong demand for newness, particularly in dresses, swim, and more casual festival attire as spring is in full swing in the U.S.

The brand also continues to expand their sustainable, low impact swim and inclusive sizing collections. As part of the inclusive sizing collections, they're seeing high demand for petite styles, which is already outperforming expectations, and more importantly, attracting new customers to the brand. As we mentioned last quarter, Princess Polly also launched a Princess Polly logo branded collection, which nearly sold out in the first few weeks, underscoring that brand affinity and loyalty is strong. On the marketing front, Princess Polly's priority is connecting with their customers in an authentic way and showing up wherever their customers are. They continue to refine their TikTok marketing strategy and saw a lift in follower count, engagement, and ROI in the first quarter.

Additionally, as part of their efforts to build brand awareness, they held a large spring break event in Miami, which was their first in-person event since 2019. During the day, the Princess Polly team drove around in a branded Jeep, giving out Princess Polly merchandise and gathering social media content. At night they held a private rooftop event for their top-tier customers, influencers, and college ambassadors. Feedback from customers and influencers was overwhelmingly positive, with nearly 400 influencer posts and over 55,000 social media engagements during the event. As mentioned, we are testing omni-channel initiatives across all of our brands to create more touch points and broaden our reach.

Through surveys and focus group, we receive feedback from Princess Polly customers that they wanted to physically experience the brand in person, to be able to touch and feel the fabric, try on items in a store, and interact with Princess Polly associates. I'm excited to announce that they have officially signed a lease for the Princess Polly store, which we expect will open in the Century City Mall in Los Angeles in the third quarter. This location is a perfect strategic fit for Princess Polly's first store, given the high volume of Gen Z and millennials shopping the open air mall daily. We look forward to the store opening, and we'll develop and share plans for future Princess Polly stores based on the learnings from this initial store. As announced last quarter, Princess Polly also piloted their first wholesale partnership with PacSun.

The initial test, which included select Princess Polly styles online and in 15 stores, exceeded expectations, with more styles selling out in just a few days. I'm excited to announce that given the success of the partnership, we will roll out select Princess Polly styles to 35 more stores for a total of 50 PacSun stores by the end of June. This initial customer excitement gives us great confidence about Princess Polly's potential in the US, both through direct-to-consumer and omni-channels. Petal & Pup is also exploring ways to increase brand awareness through their own marketing efforts as well as through omni-channel opportunities. Petal & Pup launched on Target Plus in March and continues to gain traction. As a reminder, we will carefully choose our wholesale and marketplace partners, focusing on those that can truly amplify our brand awareness and drive new customer acquisition.

Additionally, as I mentioned, newness is back at our brands, and Petal & Pup launched more than 800 new styles on their own website in the first quarter and launched a new swim collection, which is seeing strong sell-through. Petal & Pup continues to leverage learnings from Princess Polly and is also leaning into TikTok and in-person influencer events. They've grown their TikTok followers over 140% year-over-year, and in April, they hosted a 3-day influencer trip to Palm Springs, which generated over 18 million social media impressions. Turning to our streetwear brands. We continue to be very pleased with the acceleration of Culture Kings in the U.S. since the flagship opened in Las Vegas in November.

As many of you saw, the Culture Kings store in Las Vegas elevates the standard for retail with revolutionary in-store events, including a DJ booth, half basketball court, recording studio, secret room, and more. In the first quarter, the Vegas store hosted several large events which not only drove traffic to the store, but also generate viral hype and content for social media. They held an exclusive event with professional UFC fighter, Jon Jones, which was so well attended that the line to enter the store was wrapped around the mall. They also activate the store space in innovative ways, including a media workout with professional boxer Caleb Plant in a custom 18 by 18 boxing ring, a full recording studio takeover and songwriting workshop with GRAMMY-winning artist Eric Bellinger, an in-store live performance on the LED staircase by up-and-coming singer and rapper Roy Woods.

Recently they partnered with Playboy on an exhibit featuring vintage artifacts from Playboy timed with an exclusive merchandise collaboration. Culture Kings also partnered with Rolling Loud, the largest hip hop festival in the world, with a Culture Kings stage, a limited capsule collection, and in-festival activations. The festival in L.A. saw over 185,000 attendees and was highly successful. We're just getting started expanding Culture Kings in the U.S., and we're excited by several innovative partnerships underway that will continue to amplify the brand in the U.S. and globally. Equally noteworthy is the continued success of Culture Kings' in-house design brands, which come at a higher gross margin and make up seven of the top 10 brands by sales in both the Vegas store and online in the U.S.

Culture Kings is also continuing to drive growth through their emphasis on graphic tees and printed licensed collaboration, capitalizing on pop culture themes, higher gross margins, and swift turnaround times. Some recent examples of successful collaborations with licensed properties include Harry Potter, Lord of the Rings, and Batman. With upcoming releases of Transformers to coincide with the new movie, as well as WWE Classics and UFC athlete printed T-shirts. The Vegas store marked the official launch of Culture Kings in the U.S., and I'm pleased with the response from customers, vendors, and potential partners.

Since the launch of Culture Kings, we've received numerous inbound vendor requests, and they recently signed on a number of third-party footwear brands, including New Balance and Crocs, and they recently secured PUMA, UGG, Clarks, and Salomon. We're also particularly encouraged by the synergies between mnml and Culture Kings, as mnml has become a top five brand at Culture Kings in the U.S. and is leveraging Culture Kings as a distribution platform to further expand their brand. In conjunction with Caleb Plant's Vegas event, mnml collaborated with Plant on an exclusive capsule collection which exceeded sales expectations. We're also really excited that mnml is resonating not only with sports fans, but also with athletes themselves. mnml was spotted on NBA players over 100 times this year, pre- and post-games. Their outfits have featured on team, league, and player socials.

Now, I'll give you more detail on our financials before taking your questions. As mentioned, for the first quarter, net sales were $120 million, a decline of 19% compared to the first quarter last year, which exceeded our expectations. On a constant currency basis, net sales were down 16% compared to last year. Total orders for the first quarter were 1.5 million, up 7% on a two-year stack and down 17% to last year. Order volume was impacted by lower marketing spends compared to last year, as well as the challenging macro backdrop, which impacted conversion. As we increased our marketing efforts throughout the quarter and improved product newness, we saw an improvement in traffic trends. We are pleased with the improvement but remain cautiously optimistic as the macro background remains uncertain.

Average Order Value of $80 was down 4% compared to the first quarter last year on a reported basis and flat in constant currency. As we accelerate the inflow of newness throughout the quarter, we are encouraged to see improvements in AOVs. We're also pleased with our industry-leading return rate, which was approximately 17% for the first quarter, which was relatively flat compared to last year. I'll provide a few highlights from our three regions. The U.S., our largest market, continues to be our strongest region. Importantly, in the first quarter, the U.S. accounted for 60% of net sales, compared to 52% last year, demonstrating the shift to the U.S. across our portfolio.

First quarter net sales were $73 million, up 44% on a two-year stack on a pro forma basis, and down 6% compared to last year, primarily due to macro factors, including softness in demand trends and the highly promotional macro environment. In Australia, net sales were AUD 36 million, down 31% compared to last year and down 27% on a constant currency basis. In the first quarter, Australia accounted for 30% of net sales, down from 35% last year. Australia remained challenging due to the macroeconomic environment and inflationary pressures. We also continued to see an exaggerated shift of customers returning to stores post strict COVID lockdowns. Notably, Culture Kings stores significantly outperformed the online business. We currently operate seven stores in Australia and look forward to opening a new store in Melbourne in the second quarter. Turning to the rest of the world.

Net sales of $12 million decreased 35% from the first quarter in the prior-year. Our strategic decision to shift marketing dollars from the UK and Europe to our main regions, which have higher returns, continues to negatively impact trends in these regions. Moving on to profitability. Gross margins in the first quarter were 56.9%, compared to 56.8% in the same period last year, are up 10 basis points, driven by improved full price selling given the increased product newness. Selling expenses were $34 million, compared to $40 million in the first quarter of 2022. Selling expenses were 28.6% of net sales, compared to 27.2% of net sales in the first quarter of 2022.

Although the rates likely increased year-over-year, we have made productivity improvements in our fulfillment centers and outbound shipping, but the lower sales volume offset these improvements due to the higher fixed cost deleverage. Marketing expenses were $14.8 million, compared to $15.7 million in the first quarter of 2022. On a rate basis, marketing expenses were 12.3% of net sales, compared to 10.6% of net sales in the first quarter of 2022. Through the first quarter, we ramped up our marketing investments in line with the increased newness in the assortment, which drove more sessions, traffic and conversion. We are fully leveraging our flexible marketing models to achieve the highest returns on marketing spend.

We continue to refine and further develop our marketing muscle across the portfolio to attract new customers and enhance our relationships with existing customers. General and administrative expenses were $25.9 billion, compared to $24.8 billion in the first quarter of 2022. On a rate basis, G&A expenses were 21.5% of net sales, compared to 16.7% of net sales in the first quarter of 2022. The change on a rate basis was driven by net sales deleverage. We delivered adjusted EBITDA of $2.2 million, which exceeded our expectations when we gave our guidance at the beginning of the year. This compares to $10.7 million in the first quarter last year.

Adjusted EBITDA margin for the first quarter of 2023 was 1.8%, compared to 7.2% in the same period last year. Net loss was $9.6 million or $0.07 per share in the first quarter of 2023 compared to net income of $1.5 million or $0.01 per share in the same period last year. Turning to the balance sheet. We ended the quarter with $30 million in cash and cash equivalents and $132 million in debt. At the end of the first quarter, we had total liquidity of approximately $50 million. As I mentioned earlier, I'm pleased that we paid down $11.4 million of debt in the first quarter and subsequent to the quarter end, we made additional payments of $10 million, bringing our total debt pay down to more than $21 million year-to-date.

The teams have been hard at work managing the inventory, and we're very pleased with the improvements. Inventory at the end of the quarter was $112 million compared to $121 million at the end of the first quarter of 2022. Total inventory dollars were down 7% and units were down 14% compared to last year. We feel confident in the composition, newness and quality of our inventory, and we expect to see continued sequential decline in inventory dollars and units in fiscal 2023 on a constant currency basis. Touching on cash flow. In the quarter, we used $3 million of net cash, which compares to $15 million in the first quarter of 2022. The reduction in cash use was primarily driven by more prudent inventory management.

Turning to our outlook, as we look at the remainder of 2023 and beyond, we're excited by our brand's growth initiatives and the channel expansion opportunities to drive heightened awareness. That said, we continue to manage the business prudently and will balance growth and profitability. We are controlling the controllables and we continue to find efficiencies in our operations, improve our inventory position, reduce our debt and effectively strengthen our balance sheet. Overall, we are adjusting our guidance to reflect our stronger than anticipated first quarter. We now expect to deliver between $575 million and $605 million in net sales and between $36 million and $38 million in EBITDA.

We still anticipate that the first half of the year will be more challenging from a sales comparison perspective due to our strong performance in the first half of last year, and we anticipate comps easing in the back half. For the second quarter, we expect to deliver net sales between $137 million and $140 million and adjusted EBITDA in the range of $5.5 million and $6 million. To give more color on the middle of the P&L, we expect gross margin and marketing rates in the second quarter to be similar to the rates in the second quarter last year. We anticipate selling expenses to improve on a rate basis due to the operational efficiencies we've been working on in the business.

Before I take your questions, I want to let you know that Jill continues to work through her medical issues, but she's doing well and appreciates everyone's well wishes. To conclude, our go forward priorities are clear. We're heads down executing on our growth strategies and exploring new ways to broaden our reach. We will continue to operate with flexibility and discipline, taking the necessary steps to strengthen our financial foundation and reinvest in our business. We're optimistic about the future of our brands and business model and remain committed to delivering both growth and profit over the long term. Now we'll open it up for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question today, please press star one from your telephone keypad and a confirmation tone will indicate that your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Once again, that's star one. Thank you. Thank you. Our first question today is from the line of Oliver Chen with TD Cowen. Please proceed with your questions.

Jonna Kim (Director and Senior Equity Research Analyst)

Thank you. This is Joanne for Oliver. Thanks for taking our question. Just curious, you know, what gives you confidence about the second half rebound in terms of sales growth and considering, you know, all regions in the U.S. and Australia, how that would sort of trend? Also if you can comment on the current promotional environment across regions and if you are sort of happy with your current inventory position as well. Thank you so much.

Ciaran Long (Interim CEO and CFO)

Yeah. Thanks, Joanne. You know, I think for us, as we kind of, you know, think about the back half, you know, I think really, you know, we're happy that we kind of did a little bit better than we expected in Q1. Particularly happy to see, you know, the U.S. up 44% on a 2-year stack. Really see, you know, it's good to see customers again really engaging with the brands. You know, I think as we think about the back half, we're, you know, we're very focused on just execution, balancing growth and profit, and making progress on those growth initiatives that we've talked about. You know, our Q2 guidance, back half guidance. Q2 certainly contemplates what we're seeing going on at the moment with customers.

I think, you know, I suppose looking forward to getting into the back half where comps ease for us slightly relative to last year. Just on a regional basis, you know, I think we continue to see that, you know, both regions quite different. You know, we're glad now the U.S. is 60% of the overall business. I think as we went through the quarter, we did see promotional activity there lessen somewhat. With that, we were able to spend more into marketing and saw more efficiency there. Just kind of, you know, good to see the progress there. I think we still did see conversion pressure in the U.S. I think the consumer's mindful of what they're spending.

Look, we are seeing strength in kind of summer-relevant products. Looking for that progress to continue. I think in Australia it's obviously more challenging, and we see that in the results. I think the consumer there is pressured with inflation and interest rates and the kind of dramatic shift back to stores. You know, we do see that we have fairly similar performance to the concept that we look at in the region, at in the region. We're not looking for the comps to change there at any time soon.

Jonna Kim (Director and Senior Equity Research Analyst)

Got it. Just on the promotional environment, what are you seeing there and how are you positioned with your inventory?

Ciaran Long (Interim CEO and CFO)

Yeah, thanks. You know, it's for us, I think it's really great to see that inventory is down 7% year-over-year and 11% in units and really good progress there and being able to do that and hold margins flat year-over-year, I think really is a testament to the power of the test and repeat model that we have. I think we still see promotions elevated, certainly elevated from where they were last year. I think they sequentially have eased since Q4, but we are expecting them to remain elevated as we go through Q2. That's why I think we expect our gross margin to be pretty flat year-over-year.

Jonna Kim (Director and Senior Equity Research Analyst)

Got it. Thank you so much.

Operator (participant)

Our next question is from the line of Edward Yruma with Piper Sandler. Please proceed with your questions.

Edward Yruma (Managing Director and Senior Research Analyst)

Hey, good afternoon. Thanks for taking the question. Jill, if you're listening, best wishes, and we're pulling for you. I guess first, you know, we've had some companies report kind of a better trend kind of quarter to date or current five weeks with March having maybe seen a trough. I guess I know you've talked about some better response in newness, but I was wondering if you could kind of give a little bit of color on the intra-quarter cadence and exit trajectory. Then second, as you kind of explore some of these alternative channels for Princess Polly, if it's wholesale, the store opening, I guess kind of in the medium term, what % of sales do you think they will account for? Or are you still at this point really much in test? Thank you.

Ciaran Long (Interim CEO and CFO)

Thanks, Ed. Yeah. As we think about trends going through the quarter, I think, you know, certainly start of the quarter, as we talked about on our last call, really that heightened promotional activity from that was there in Q4 continued in through the first half of the quarter. I think, you know, as we saw that easing, we were also making really good progress on just the newness of inventory, particularly across the women's brands. With that, we were able to spend into more marketing. You know, we did see our comps get better as we spent into that additional marketing.

I think really coming from more traffic, we're certainly seeing that conversion is still challenged as we go through the first kind of four months of the year. You know, I would say what we're seeing in the first part of Q2 is pretty similar trends to what we saw towards the end of Q1. You know, we haven't seen a big change in trend over that kind of March, April into early May period. That's pretty consistent at the moment. Then as we think about these kind of omni initiatives, you know, really, I think for us we're really happy that we are predominantly a direct-to-consumer business, you know, and a direct-to-consumer business that consistently and has always generated EBITDA.

You know, we're back now generating cash, which is great, and we're looking for that part of our business continues to be our main focus and our main growth driver. You know, having said that, we do understand that, you know, it's key to being a next-generation brand is just being everywhere our customers are. You know, we are looking to introduce our brands to just more and more customers, build brand awareness, and ultimately increase the total addressable market for each of these brands, and that's why we're doing these omni tests. You know, I think near term, we don't have any set percentage, Ed, on kind of what we're looking to get out of any of these channels. I would say all of the brands are doing tests on different omni-channel opportunities and initiatives.

You know, in the last couple of months we're learning a lot. We're continuing to learn, and I think, you know, we'll take those and, you know, obviously lean into that first Princess Polly store, which we're looking forward to that opening in Q3. We'll continue to push on those initiatives as we go through the year.

Edward Yruma (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

The next question is from the line of Alice Xiao with Bank of America. Please proceed with your question.

Alice Xiao (VP of Equity Research)

Hi. Thank you for taking my question. Can you please elaborate on just the gross margin puts and takes throughout the year? Just wanted to clarify, was that flat gross margin guidance for 2Q specifically? You know, just wanted to confirm if for the fiscal year, you're still expecting about 100 basis points of improvement as we lap some of the freight cost and product mix impacts. Thank you.

Ciaran Long (Interim CEO and CFO)

Right. Yeah, thanks, Alice. Maybe I'll take those backwards. Yeah, I think over the year, we're expecting it to be about 100 basis points of improvement, we see that coming in the back half of the year. You know, what we saw in Q1 is that we were flat year-over-year on gross margin. Look, really pleased that we were able to do that while bringing down our inventory, as I talked about, and doing it in a time when it was, you know, a heightened promotional environment year-over-year. I think we're expecting the same in Q2, that we would be flat in gross margins year-over-year. For us, that's, you know, the promotional environment that we're seeing today will continue, but we'll continue to lean into that test and repeat model.

With that, continue to bring on product newness, and we feel that will offset some of that promotional activity that we're seeing. We are obviously starting to get the benefit of lower inbound freight costs as well. That's also helping as we kind of as we take advantage of the newness.

Alice Xiao (VP of Equity Research)

That's super helpful. Thank you. Secondly, I was curious to hear more about the Target launch. You talked a bit about the PacSun. Just curious what percent of assortment, you know, are available on both wholesale partners and, you know, throughout the year, are you planning to make more larger percentages of the assortment available?

Ciaran Long (Interim CEO and CFO)

Sure. Thanks, Alice. Petal & Pup has put our DNA test on Target, on their curated marketplace. We're seeing some really nice results there. You know, they have probably 60% of their assortment, which is obviously quite a bit smaller than Polly, on Target. It went up in probably mid-February. We are seeing nice progress as we've kind of gone through the last three or four months with it. As we learn, kind of, you know, improving the experience that customers have there, adding reviews, adding size charts, just kind of, you know, basic block and tackling stuff. I think we are seeing that it is introducing new brands to different customers, and we are able to clearly see that.

We also see that different parts of the assortment is doing, you know, has a different, is a different share and a different impact on Target. I think at this stage, you know, A lot of nice things. We see a lot of opportunity there. We're still very much in test mode, and we'll update you again next quarter as we learn more.

Alice Xiao (VP of Equity Research)

That's great to hear. Thank you.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question today, you may press star one from your telephone keypad. The next question is from the line of Dana Telsey Group. Please proceed with your question.

Dana Telsey (Founder, CEO, and Chief Research Officer)

Hi, good afternoon, and also please extend our thoughts of getting well quickly to Jill. As you think about the active customer count, it looks like the active customer count from the fourth quarter to the first quarter changed to the negative. What did you see there? What did you see by brand? How did it differ? Also, in terms of Petal & Pup and Princess Polly and Culture Kings, any difference in level of promotions by brand and what you're seeing or what you're doing in the environment? Thank you.

Ciaran Long (Interim CEO and CFO)

Thanks, Dana. Yeah, on active customers, you know, we saw a decline of about 5% year-over-year and sequentially from Q4. Just as a reminder, that's a trailing twelve-month number. You know, as we expected, I think, you know, as, you know, pulling back by 25% on volume of marketing dollars in Q4 certainly impacted our active customer count. You know, we saw that as we kind of went through the Q1 as well. It was certainly more impacted early in the quarter. I think as we saw, you know, newness return into the brands, you know, marketing effectiveness improved, and we're able to increase our marketing dollars. We, we did see the count improve. I would say we've seen it more on repeat customers and the older cohorts coming back first.

I think, you know, some nice improvement there as we've gone through the year and starting to see them kind of return to the historic repeat rates that we have seen. You know, we're still down on new customer count. You know, I think that's, you know, based on kind of what we're seeing on TAM and in the market, that's very much understandable. I think we expect to be down on active customers probably as we go through Q2 and Q3 of this year, and would expect to be back kind of positive in Q4. Look, I think that's partly why we are looking at these other omni-channel initiatives as well. We wanna get these brands, you know, continue to introduce new customers to the brand, build awareness and ultimately increase that TAM.

Then Dana, on promotions. sorry, just on active by brand. I would say we pretty much saw the same percentage impact across the brands. No huge difference. That was on a regional basis as well as in the U.S. I would say kind of Culture Kings in the U.S., Did see positive active customer growth, and that really coming from us, you know, opening the store in Vegas in November and just that really is having a positive impact for us in the U.S. Then just promotions by region. really similar across the regions. you know, I would say just that heightened promotional activity was certainly there in the quarter, easing as we went through the quarter.

I would say we probably see customers reacting more to promotions in Australia than we see in the U.S. They're a little bit more sensitive to those.

Dana Telsey (Founder, CEO, and Chief Research Officer)

Thank you. Just one follow-up. Debt paydown. How are you thinking of debt paydown for the balance of the year?

Ciaran Long (Interim CEO and CFO)

Yeah. Thanks, Dana. You know, I'm glad to be talking about that we're paying down the debt and that we've paid down $21 million so far year-to-date. Look, we're gonna continue to manage the business prudently, strengthen the balance sheets and, you know, bringing down our inventory dollars sequentially and bringing down our debt dollars sequentially quarter-over-quarter as we go through the year is a focus for us and important for us. You know, we don't have any set number there, but we're just gonna keep making progress as we go through the year.

Dana Telsey (Founder, CEO, and Chief Research Officer)

Thank you.

Operator (participant)

Our next question is from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Jesse Sobelson (Associate Equity Analyst)

Hello, everyone. This is Jesse Sobelson on for Ike. Can you just refresh us on the composition of the $120 million or so in current outstanding debt and what covenants, if any, are associated with the tranches? Thank you.

Ciaran Long (Interim CEO and CFO)

Sure. Thanks, Jesse. Within that debt, and it was $130 million at the end of the quarter. Within there's $30 million of revolver, we paid down an additional $10 million on that revolver post end of quarter. There's $104 million of term debt. You know, covenants are, we've got a 3.5x from a leverage perspective, and about 1.25 from a fixed charge coverage. You know, with obviously some add backs for one-off stuff. You know, we're well within all of our debt compliance covenants and, you know, feeling good shape overall about the debt. We'll look to continue to bring that down as we go through the year.

Jesse Sobelson (Associate Equity Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. At this time, we've reached the end of the question and answer session. I'll turn the call back over to Ciaran Long for closing remarks.

Ciaran Long (Interim CEO and CFO)

Thank you all for joining. We really appreciate your participation. Thank you for the well wishes for Jill. I know she's on the call listening today, and we talk to her quite often. Yeah. Thank you. Good to hear from you all, and thanks.

Operator (participant)

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.