aka-20211231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________________________
FORM 10-K
__________________________________________________________________________________________________
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-40828
__________________________________________________________________________________________________
a.k.a. Brands Holding Corp.
(Exact name of registrant as specified in its charter)
__________________________________________________________________________________________________
100 Montgomery Street, Suite 1600
San Francisco, California94104
(Address of principal executive offices, including zip code)
415-295-6085
(Registrant’s Telephone Number, Including Area Code)
__________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share AKA New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933 (“Securities Act”). Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ̈ Accelerated Filer ̈
Non-accelerated filer x Smaller Reporting Company ̈
Emerging Growth Company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The registrant was not a public company as of June 30, 2021, the last business day of its most recently completed second fiscal quarter, and therefore, cannot calculate the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date. The registrant’s common stock began trading on the New York Stock Exchange on September 22, 2021.
As of February 25, 2022, the registrant had 128,647,836 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2022 Annual Meeting of Stockholders (“Proxy Statement”), to be filed within 120 days of the registrant's fiscal year ended December 31, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.
Table of Contents
a.k.a. BRANDS HOLDING CORP.
FORM 10-K
TABLE OF CONTENTS
Page
Forward-Looking Statements 3
PART I
Item 1. Business 4
Item 1A. Risk Factors 16
Item 1B. Unresolved Staff Comments 54
Item 2. Properties 54
Item 3. Legal Proceedings 55
Item 4. Mine Safety Disclosures 55
PART II
Item 6. Selected Consolidated Financial Data 57
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 75
Item 8. Consolidated Financial Statements and Supplementary Data 76
Item 9A. Controls and Procedures 111
Item 9B. Other Information 112
PART III
Item 10. Directors, Executive Officers and Corporate Governance 113
Item 11. Executive Compensation 113
Item 14. Principal Accountant Fees and Services 113
PART IV
Item 15. Exhibits and Financial Statement Schedules 114
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FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, or that describe our plans, goals, intentions, objectives, strategies, expectations, beliefs and assumptions, are forward-looking statements. The words “believe,” “may,” “might,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “project,” “plan,” “objective,” “could,” “would,” “should” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. We caution that the forward-looking statements in this Annual Report on Form 10-K are subject to a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:
•the effects of the COVID-19 pandemic on our operations, customer demand and our suppliers’ ability to meet our needs;
•rapidly-changing consumer preferences in the apparel, footwear and accessories industries;
•failure to acquire new customers, retain existing customers, or maintain average order value levels;
•the effectiveness of our marketing and our level of customer traffic;
•merchandise return rates;
•our success in identifying brands to acquire, integrate and manage on our platform, and expansion into new markets;
•the global nature of our business;
•our use of social media platforms and influencer sponsorship initiatives;
•inherent challenges in measurement to which certain of our key operating metrics are subject;
•tax liabilities that may increase the costs our consumers would have to pay for our offerings;
•economic downturns and market conditions beyond our control;
•fluctuations between non-U.S. currencies and the U.S. dollar;
•our ability to attract and retain highly qualified personnel;
•fluctuations in wage rates and the price, availability and quality of raw materials and finished goods;
•interruptions in or increased costs of shipping and distribution; and
•the other factors set forth under “Risk Factors.”
Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to actual results or changes in our expectations, unless otherwise required by law.
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PART I
ITEM 1. BUSINESS
Our Vision
To be the global leader in direct-to-consumer fashion for the next generation of consumers through a dynamic platform of digitally native brands.
Who We Are
a.k.a. is a brand accelerator of direct-to-consumer (DTC) fashion brands for the next-generation. Beginning with the acquisition of Princess Polly in 2018, we created a portfolio of complementary brands with our subsequent acquisitions of Petal & Pup and Rebdolls in 2019 and Culture Kings and mnml in 2021. We target high-potential brands that we believe are at a pivotal point in their growth trajectory that we can integrate into our platform and accelerate their growth. Leveraging our proven track-record, industry expertise and operational synergies, we believe our brands 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.
Through our portfolio of high-growth, digitally-focused global brands, we reach a broad audience across accessible price points and varied styles. Our current brands all share a common focus on Millennial and Gen Z consumers who seek fashion inspiration on social media and primarily shop online. Nimble by design, our innovative brands are launched and fueled on social media channels. They are customer-centric and have authentic and engaging relationships with their target audiences through highly relevant social content and other digital marketing strategies. Leveraging innovative, data-driven insights, our brands introduce fresh content and high-quality merchandise daily. Our platform accelerates the growth and profitability of our existing brands, and we aim to continue expanding our portfolio. Simply put, our brands are better together.
While we have owned Princess Polly, Petal & Pup and Rebdolls from before 2020, information presented hereafter on an “across a.k.a. Brands” basis assumes we also owned Culture Kings for all periods presented.
We Efficiently Acquire Customers Through Inspiring, Digital Content
Our brands engage with customers by releasing a stream of inspiring digital content at high frequency. We believe our content-rich narrative and authentic brand messaging drives organic traffic to our websites, efficiently generating demand, enhancing connectivity with customers and amplifying our brand communities. Our brands maintain relationships with approximately 17,000 influencers globally and utilize them to test and launch new products, gather customer feedback, increase brand awareness and acquire new customers in a cost-effective manner. In 2021, across a.k.a. Brands, we inspired more than 8.7 million followers on social media and served more than 3.7 million active customers.
We Leverage Data-Driven Insights to Curate High-Quality, Affordable Fashion
Our brands aim to deliver constant newness and excitement by creating and curating on-trend and affordable fashion styles that customers love. We utilize real-time data and consumer insights to identify the latest trends and work with our global sourcing network and brand partners to quickly bring new, high-quality products to market. Our agile “test-and-repeat” merchandising model enables the flexibility to quickly react to customer demand and test product appeal without taking large initial inventory positions, yet still capture in-season demand. This model ensures that our merchandise is always on-trend and customer-led because we only replenish the styles that our customers show us that they like.
Our Brands Offer a High Mix of Exclusive Styles to Drive Loyalty
Our brands’ compelling merchandising strategy is anchored by a high proportion of exclusive styles that cannot be found elsewhere. More than 47% of our revenue is derived from products exclusive to a.k.a. Brands, which increases both demand and customer loyalty. Our customers’ satisfaction with the fit, quality, affordability and exclusivity of our styles is further reflected in our sales return rates across our brands, which was well below industry average in 2021 at approximately 14%.
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Our Platform Creates Value by Driving Synergies Across the Portfolio
Deep Industry Expertise
Our brands have access to our highly-skilled leadership team, each of whom has a proven track-record and decades of experience building and scaling successful eCommerce businesses. We have deep expertise in the business of fashion, and we support our brands so they can focus on customer-facing priorities such as branding, merchandising and maintaining an authentic connection with customers.
Innovation Hub and Knowledge Sharing
Our platform enables and encourages a network of cross-brand learnings to advance innovation and promote best practices – what accelerates profitable growth for one brand can accelerate profitable growth for others. Across our brands, we test and learn digital innovation and facilitate knowledge sharing and benchmarking of key performance metrics to improve growth, operational efficiency and profitability.
Flexible Technology Stack and Operations
Our platform leverages a broad network of third-party service and technology providers, which allows us to implement the latest capabilities with limited upfront investment and quickly adopt innovations in the market. We utilize a combination of owned and third-party logistics and fulfillment assets and third-party technology partners, creating flexibility to support our high-growth brands. We customize our approach for each brand to allow for optimization and tailored growth tools, which sets us apart from other centralized platforms. For example, while we maintain a network of proven vendors across the portfolio, we allow our brands to take a custom approach to which vendors they use. Therefore, there is minimal operational disruption when we acquire new brands given our flexible operations approach. Additionally, through our a.k.a. platform and the scale it provides, we negotiate favorable rates with our vendors, providing our brands with attractive terms and enhancing overall profitability.
We Promote Diversity and Practice Responsible Fashion
Our brands reflect the diversity and beauty of our customers and we continuously seek ways to expand the diversity in our brands, products and marketing. We believe diversity and sustainability align with our core values and drive better results. We operate responsibly and are committed to responsible fashion and sustainability through prioritization of transparency, fair labor practices and reduced waste.
Our Powerful Economic Model
We believe our platform is differentiated by its unique ability to attract and retain a wide range of Millennial and Gen Z consumers through authentic brand messaging and curated, on-trend fashion. In 2021, across a.k.a. Brands, we:
•attracted approximately 289 million site visits, with 61% from unpaid sources
•grew our active customer base by 61% from 2020, who placed 48% more orders at 7% higher average order value compared to 2020
•had a low sales return ratio of approximately 14%
We believe our robust growth and profitability validate our platform approach and asset-light business model. We grew revenue by 160% from 2020 to 2021 and achieved $562.2 million in net sales, while our adjusted EBITDA increased by 2.1 times from 2020 to 2021.
Industry Overview
Large and Growing Global Apparel, Footwear and Accessories Industry
We primarily operate in the large and growing global apparel, footwear and accessories industry. According to Euromonitor, a consumer market research company, the industry grew to an annual spend of $1.7 trillion in retail sales in 2021 from $1.3 trillion in 2010, representing a CAGR of 2.7% over this time period. Although 2021 retail sales were negatively impacted by the COVID-19 pandemic, the industry is projected to grow at a 8.1% CAGR from 2020 to 2025. Though we ship our products globally, we operate primarily in two geographies, the U.S. and Australia. The U.S. apparel, footwear and accessories market grew to $370 billion in 2019 and is expected to grow at a 8.9% CAGR from 2020 to 2025. The Australian apparel, footwear and accessories market grew to $18.7 billion in 2019 and is expected to grow at a 6.5% CAGR from 2020 to 2025. We believe the key factors driving growth within the global apparel, footwear and accessories industry include favorable demographic trends and desire for constant newness.
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Apparel, Footwear and Accessories Shopping has Been Rapidly Shifting Online
Consumers are increasingly turning to online channels to make purchases, driven by the growing Millennial and Gen Z populations and the increasing influence of social and digital media channels. According to Euromonitor, the global online apparel, footwear and accessories market was valued at approximately $300 billion in 2019, and is expected to reach $543 billion by 2025, representing a 10.3% CAGR, with online outpacing the growth of the overall market.
In the U.S., online spend was $94 billion in 2019 and is expected to reach $192 billion by 2025, representing a 12.7% CAGR. Online penetration of apparel, footwear and accessories in the U.S. has increased from 7.4% to 35.0% from 2010 to 2021, and Euromonitor expects online penetration to reach approximately 43% in the U.S. by 2025. The COVID-19 pandemic accelerated digital adoption across retail with online penetration of apparel, footwear and accessories expanding approximately 1,136 basis points in the U.S. during 2020.
Digital-Savvy Millennial and Gen Z Consumers Seeking the Next-Generation Shopping Experience
According to data from the United Nations, Millennial and Gen Z consumers, our primary target demographic today, account for 32% and 23% of the global population, respectively, making them a large and growing demographic group with significant economic influence. The U.S. Millennial and Gen Z population is also very diverse, collectively accounting for approximately 60% of the U.S. minority population. This growing, diverse base of young consumers is shaping the evolving retail landscape and differs from other generations given a focus on the following:
•Aspire to express their individual style through fashion and desire for constant newness
•Seek an emotional connection with brands through frequent interaction and shared values
•Shop and explore content online more than older generations
•Engage with social media and digital content from influencers as a primary source of inspiration and discovery to inform their purchasing decisions
•Creative Agency Composed found in November 2019 that approximately 60% of U.S. Gen Z shoppers utilize Instagram to discover new brands and products
•According to the Global Web Index, Millennials and Gen Z worldwide spend approximately 4 hours daily on average on social media
•Demand a higher accountability for brands and seek to purchase from companies that align with their values, including a focus on social responsibility, sustainability, diversity and inclusion.
•5WPR’s 2020 Consumer Culture Report found in November 2019 that approximately 83% of Millennials want to buy from companies that align with their belief and values
Changing Landscape of Brands
Over the last decade, the retail landscape has transformed, as mall-based stores, including department stores and specialty retailers, rapidly shrank their footprints or closed all together. According to IBISWorld, department store locations in the U.S. declined by approximately 30% to 6,000 in 2020 from 8,600 in 2011. In addition to department store closures, we believe many specialty retailers also experienced similar declines during the same time period. Offline retailers, as a whole, did not keep up with changing consumer preferences, such as the shift to online shopping, and carry high fixed costs associated with their large store footprints which become increasingly less profitable. These pressures led to store closures in recent years that we believe creates available market share for new, primarily digital competitors.
As consumers moved to online shopping platforms and as social media increasingly captured consumers’ time, a new generation of brands began building direct relationships with their customers through their own branded eCommerce sites, a limited number of owned stores and social media platforms. These direct channels allow brands to engage directly with consumers and build unique brand identities to appeal to specific target demographics. These factors, combined with Millennial and Gen Z consumers seeking brands that are unique and offer an emotional connection, gave rise to a fragmented landscape of digital and direct-to-consumer brands. Additionally, direct to consumer brands are not tied to a traditional wholesale development calendar, so they have greater merchandising flexibility and can get trends to customers faster.
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The Attractive Streetwear Industry
With our recent acquisitions of Culture Kings and mnml, we entered the growing, global streetwear market, which was estimated to be $185 billion in 2019. Streetwear, which is primarily comprised of footwear, T-shirts and other apparel and accessory items, has gained an almost cult-like following among consumers. This is particularly true for Gen Z, which is estimated to be the largest group of streetwear shoppers, with approximately 60% of shoppers under the age of 25.
Growing demand for streetwear is driven by product exclusivity and versatility, as well the broader casualization of fashion. The anticipation of limited opportunity to buy drives scarcity value, offering a unique avenue for self-expression among consumers. These unique attributes of streetwear give it a cache or “cool” factor among consumers which is driving outsized industry growth.
Our Competitive Strengths
Diversified Portfolio of Global Brands Targets Distinct Audiences and Expands Reach
We strategically acquired a portfolio of brands with strong followings from Millennial and Gen Z customers. The collective reach of our brands is diversified across age, gender, geography and life stage. Yet, each brand targets a distinct customer segment. The typical customer is a 15-25 year old woman for Princess Polly, a 25-40 year old woman for Petal & Pup, an 18-34 year old plus-sized diverse woman for Rebdolls, an 18-35 year old male for Culture Kings and a 18-35 year old male for mnml. Each of our brands maintains their own identities and tailors brand messaging and products to their unique customer bases, creating authentic connections and driving strong loyalty. Additionally, our global footprint and portfolio of brands allows us to diversify from potential risks associated with a single brand or a single market, enhancing platform level returns.
Demand-led, Data-driven Merchandising Drives Speed to Market and Full Price Sell Through
Our brands utilize a data-driven approach to merchandising, identifying consumer demand trends and introducing relevant products with rapid speed-to-market. Princess Polly pioneered the “test-and-repeat” product buying model, and now our other brands have learned the strategy from being a part of the a.k.a. platform and are employing it as well. The brands make initial purchases of a wide variety of new products in small quantities, releasing a steady stream of new arrivals as frequently as daily and observe early signals on transaction and browsing patterns to quickly validate consumer appeal. This customer feedback loop allows our brands to rapidly replenish successful styles and scale-back on less successful products. Our on-trend offerings and short product cycle are designed to generate constant newness, encourage product discovery, drive online traffic and full price sell through. In 2021, the average order value across our brands increased by 7%.
Additionally, our presence in the U.S. and Australia allows us to monitor seasonal trends across markets months and even seasons in advance. We leverage these data-driven demand insights from one hemisphere to inform purchasing decisions for the following season in the other hemisphere. We can also ship end of season merchandise to the other hemisphere to avoid costly end of season markdowns.
The value proposition of our brands is further enhanced through a high mix of exclusive products that cannot be found elsewhere. In 2021, more than 80% of merchandise sold at Princess Polly was proprietary. In 2021, approximately 38% of products sold at Culture Kings were exclusive via owned brands, licensed brands, limited editions and brand collaborations. We believe the high portion of exclusive offerings generates excitement, anticipation and loyalty among customers, fuels traffic and demand, and differentiates us competitively. The strong margin profile of our proprietary assortment further improves overall profitability. Additionally, our brands standardize the sizing of their proprietary products and provide customers with better sizing guides, inspiring consumer confidence in quality and fit. In 2021, the sales return rate across a.k.a. Brands was 14%, which is significantly lower than industry average.
Inspirational Content Propels Customer Engagement and Efficient Marketing
Our brands drive continuous engagement with customers through inspiring digital content. We believe the quality and quantity of our content differentiates us from our competitors and seamlessly delivers each brand’s core messaging and lifestyle positioning. We release fresh content as often as hourly across a variety of digital mediums. Our brands have built a community of over 8.7 million brand loyalists and enthusiasts across multiple social media channels, including Instagram, Facebook, YouTube and TikTok, and our brands constantly evolve their customer engagement strategy.
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Our brands partner with an extensive network of approximately 17,000 influencers, focusing on those with small to medium, but loyal, followings. We believe these micro-influencers have a strong emotional connection with our brands and feature our products in a highly authentic way that resonates with customers. Our focus on micro-influencers is intended to create a more authentic relationship with customers, mitigate the risk from individual celebrity or macro influencer endorsements and achieve higher returns on our marketing investment. Our strong value proposition combined with our efficient marketing tactics results in low customer acquisition costs and high customer lifetime value.
Additionally, Culture Kings operates eight experiential concept stores in major cities in Australia and New Zealand that serve as powerful customer acquisition tools, and provide customers a unique and immersive brand experience. The stores are one-of-a-kind retail experiences, with celebrity events, activations and in-store gamification. Culture Kings captures compelling content from their stores and events and promotes it on their digital channels, driving increased brand awareness. Culture Kings is the only brand in our current portfolio with stores.
Powerful Platform Accelerates Profitable Growth
Our brands operate independently but have access to resources, guidance and vendors at the a.k.a. level. We believe this model balances scale-enabled cost savings with operational flexibility, facilitates low-risk innovation and accommodates the needs of our brands at various stages of growth. Our platform is designed to provide collective advantages and accelerate profitable growth in both existing and new markets and allows us to manage the brands at a portfolio level.
•Asset-light, third party approach drives operational synergies while maintaining flexibility. We maintain a wide network of third-party technology vendors and suppliers across our sourcing, distribution, technology and back-office functions. We utilize common providers across brands where possible and leverage our scale to negotiate collectively to drive cost and operating synergies. As a result, our brands are able to focus on customer engagement, brand building and marketing, while benefiting from operational services at scaled pricing that the brands would be unlikely to obtain on a stand-alone basis. For instance, we have optimized our logistics and fulfillment capacity by utilizing a combination of owned assets and a network of third-party vendors, allowing for the flexibility to make real-time operational adjustments to accommodate the needs of our high-growth brands.
Our flexible and asset light approach to technology allows us to stay at the forefront of innovation in order to better serve our customers and enhance profitability. We aim to stay on the forefront of digital innovation by experimenting with emerging capabilities that enable our brands to enhance the customer experience in a cost-effective manner. Additionally, we are often early adopters of the latest innovations and are viewed as an attractive partner for leading technology platforms. We consider the nimbleness enabled by our third-party technology a compelling advantage over our competitors who maintain proprietary technology platforms that require significant initial investment, ongoing maintenance costs and generally creates long lead times to deploy and leverage.
•Testing of innovative solutions and shared best practices. While our brands have broad autonomy to experiment with new operational solutions, at the platform level we identify best practices and facilitate the sharing of this knowledge across our brands. For instance, the “test-and-repeat” model first deployed by Princess Polly has been subsequently adopted by Petal & Pup. We also standardized operational and financial performance metrics so that our brands can benchmark against each other.
•Highly experienced management team. We assembled a highly experienced executive leadership team with deep and diversified eCommerce and fashion experience that spans from start-ups to Fortune 500 companies. Our a.k.a. Brands executive team complements our brand management teams by providing significant experience in scaling digital businesses over the last 20 years.
•Next generation culture. While each of our brands celebrates its own unique culture and brand values, we collectively embrace a next generation mindset:
•We are customer-led; focusing relentlessly on delivering a high-quality customer experience,
•We move fast; executing on innovative ideas swiftly,
•We are data driven; using data and analytics to make smarter decisions every day,
•We are growth minded; testing and learning continuously in and across our brands,
•We are diverse; celebrating and expanding the diversity of our customers and teams,
•We act with integrity and practice responsible fashion; when in doubt, we resort to the high standard.
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Our Growth Strategies
We believe our global direct-to-consumer fashion brands are disrupting categories with strong fundamental growth and capitalizing on long-term global secular tailwinds. We intend to execute the following strategies to expand our platform and gain market share:
Grow our Brands Organically in our Existing Markets
•Grow Brand Awareness and Acquire New Customers. We believe our brands are underpenetrated in the markets in which they operate. We think there is a significant opportunity to grow awareness of our brands due to the continued secular shift to eCommerce, as well as the strength of our highly efficient, data-driven marketing model. We intend to efficiently acquire new customers through continued investment in our content creation and social media capabilities, as well as through our network of approximately 17,000 influencers. Through continued investment in these initiatives, we believe we will be able to further appeal to our core demographic of Millennial and Gen Z consumers and increase our market share.
•Expand Product Categories and Offerings. We believe our brands are well positioned to grow by expanding product styles and entering new categories that are complementary to our brands’ current offerings. Our brands aim to identify trends and evaluate opportunities leveraging digital capabilities, data-driven insights and a test-and-repeat merchandising model. We believe our brands have a significant opportunity to expand product ranges, increase average order value and broaden customer reach. We intend to continue to increase our mix of owned brands and exclusive offerings, which we believe generate significantly higher margins and drive traffic to our websites.
•Continue to Increase Loyalty and Wallet Share. We intend to deepen customer relationships to improve customer retention and increase wallet share. We aim to achieve this by enhancing our user experience, improving engagement, refining our customer segmentation, increasing personalization, launching loyalty programs across our brands and constantly introducing new styles, designer collaborations and exclusive items. Our authentic content and steady stream of new styles encourages deep connections with new and existing customers, driving customer retention rate of 66% in 2021 across a.k.a. Brands, and resulting in an attractive customer lifetime value.
Grow through Acquisitions
Acquiring new brands is core to our strategy and an important driver of our future growth. Since our inception in 2018, we successfully acquired and integrated five brands onto our platform. We employ a corporate development team dedicated to the identification, evaluation and acquisition of brands, and we maintain a strong pipeline of potential targets which typically includes multiple acquisition opportunities at differing stages of evaluation.
We seek brands that diversify our portfolio through new demographics, markets or fashion tastes, which allows us to grow without cannibalizing our current brands. We seek direct-to-consumer brands with strong customer followings and a proven track record of operating profitably but need help scaling to further accelerate their growth. We look for talented and passionate teams who have proven abilities to leverage data, technology and content to grow. We seek asset-light brands that have the potential to benefit from the a.k.a. platform, expertise and resources. We look for brands with similar operating and financial characteristics as our existing brands. We are continuously evaluating opportunities for such acquisitions
We believe our demonstrated ability to provide infrastructure, expertise and capital to scale brands and create significant value make us an attractive partner which provides us a competitive advantage in acquiring new brands.
Grow Internationally
We intend to leverage the strength of our brands and our ability to connect with customers to expand into new international markets beyond our core U.S. and Australian markets. Net sales to customers outside of the U.S. and Australia was $74 million across 220 countries and territories and represented 13% of total sales in 2021.
We will continue to target markets that demonstrate strong social and digital media usage. We identified several markets in which we believe we can introduce one or more of our brands, such as expanding Culture Kings in Korea and Japan and Princess Polly in Canada, Europe and the U.K. We believe our experience growing the Princess Polly and Petal & Pup brands in the U.S. creates a proven roadmap to help us successfully introduce our brands globally.
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Continue to Drive Efficiencies Across Our Platform
As we continue to scale organically and through acquisitions, we aim to improve operational performance across our platform and enhance profitability. We will also look for ways to reduce our input costs by leveraging our collective scale to negotiate improved terms with suppliers and vendors, including for raw materials, freight and shipping. As our brands grow and gain scale, we intend to invest in automation and process improvement within our operations to drive lower variable costs and improved profitability.
Our Brands
The a.k.a. Brands platform consists of five differentiated brands, Princess Polly, Culture Kings, Petal & Pup, mnml and Rebdolls.
Princess Polly: Founded in Australia in 2010, Princess Polly joined the a.k.a. Brands platform in July 2018. With a tagline of “Wear It This Weekend,” Princess Polly focuses on providing fun dresses, tops, shoes and accessories with slim fit, body-confident and trendy fashion designs. The brand operates exclusively online and targets a female customer between the ages of 15 and 25, who value the brand’s high quality assortment, compelling price points and free and fast shipping. Princess Polly customers are inspired by the constant stream of inspirational social media content and the fresh, new and affordable merchandise arriving daily. Since joining the a.k.a. Brands platform, Princess Polly has experienced rapid growth and increasing brand awareness in the United States.
Culture Kings: Founded in Australia in 2008, Culture Kings joined the a.k.a. Brands platform in March 2021. Culture Kings is a premium multi-channel retailer of streetwear apparel, footwear, headwear and accessories. The brand offers its customers a curated assortment from over one hundred leading third-party streetwear brands, as well as a large and growing portfolio of owned brands and exclusive products that embody the relationship between music, sport, art and fashion. The brand targets male consumers between the ages of 18 and 35 who are fashion conscious, highly social and digitally focused. More than 50% of Culture Kings’ products are exclusive and approximately 80% of its sales are made online. Culture Kings engages with customers through a combination of compelling, online and offline marketing strategies that leverage the latest in music, fashion, art and celebrities to create brand hype and product excitement.
The brand operates eight experiential concept stores in major cities in Australia and New Zealand that serve as a powerful customer acquisition tool, and provide customers a unique and immersive brand experience. The stores feature engaging in-store designs and product displays, store fronts designed by best-in-class graffiti artists, exclusive product releases including promotional products only available in-store, and event-driven in-store activations. The stores host a variety of public events and creative activities designed to instill feelings and emotions of excitement such as sneaker vending machine, basketball shooting competitions, live DJ sessions and appearances of global celebrities and tastemakers, including athletes and on-trend music artists. The brand creates digital content based on the events and activities in-store and publishes them online, generating further hype on social media. The unique in-store experience generates excitement and anticipation, driving demand and traffic online and offline, and creating customer affiliation with the Culture Kings brands, not just the products sold.
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Petal & Pup: Founded in Australia in 2015, Petal & Pup joined the a.k.a. Brands platform in August 2019. The brand operates exclusively online and offers an assortment of trendy, flattering, feminine styles and dresses for special occasions. The brand targets female customers typically in their 20s or 30s, with more than half of customers in the 18-34-year-old age bracket. In 2019, Petal & Pup expanded to the United States, which is now its fastest growing geography.
mnml: Founded in Los Angeles in 2016, mnml joined the a.k.a. Brands platform in October 2021. mnml is a high-growth men’s streetwear brand that designs premier, fashion forward apparel at affordable prices. As an early mover in the DTC streetwear segment, mnml has created powerful brand recognition and is an established destination for modern wardrobe staples, current trends and highly sought-after styles. The brand has developed a data-driven merchandising model to bring quality, on-trend fashion to customers faster and at an accessible price point. mnml’s authentic social media marketing strategy, highlighted by its more than one million followers across social platforms, drives efficient customer acquisition and strong brand loyalty.
Rebdolls: Founded in New Jersey in 2014, Rebdolls joined the a.k.a. Brands platform in December 2019. The brand offers apparel with a full range of sizes from 0 to 32 with an emphasis on size inclusivity. Rebdolls targets the underserved market of diverse, plus-sized women and believes that now more than ever the world needs more diversity in fashion. The typical Rebdolls customer is a diverse woman between the ages of 18 and 34.
Merchandising
Our brands offer a broad yet curated assortment of clothing, footwear, headwear and accessories. Collectively, we serve both female and male customers who wear our products for a wide range of occasions. A high proportion of our offerings, or over 47% in 2021 across a.k.a. Brands, are proprietary and exclusive. Owned brand offerings represented 71% of total net revenues in 2021 and typically delivers a higher gross margin than that of third-party brands. The range and exclusivity of our offerings serve the diverse needs of our customers, generate excitement and promote loyalty.
Our brands utilize data analytics to inform the development and curation of on-trend fashion offerings. We work with a network of suppliers to achieve rapid speed-to-market. For example, Princess Polly collects and analyzes data on purchasing patterns, conversion rates and social media signals to quickly identify best-selling products and new potential product trends in the market. The brand then makes small initial purchases of inventory and observes market signals before quickly replenishing selective winning styles often “in season” to further capitalize on their popularity. This model has also been adopted by Petal & Pup since 2020 and is being implemented for Culture Kings, mnml and Rebdolls.
In addition, the global and dual-hemisphere presence of our brands allow us the flexibility to leverage the geographic advantages inherent in our platform, including the offsetting seasons across hemispheres. We have the capability to monitor and identify emerging trends in each market and season, and then quickly introduce them across geographies. Additionally, we stock inventory in both Australia and the U.S., which enables us to carry relevant, in-season merchandise. We have the ability to manage end-of-season inventory by shipping across markets where the merchandise is in-season, enhancing our inventory productivity and further encouraging full price sell through.
Sourcing
We source our products from a network of international suppliers. Our supplier base includes approximately 267 suppliers across 8 different countries as of December 31, 2021.
We have strong long-term relationships with our manufacturers, but we do not have any long-term commitments requiring us to purchase minimum volumes from any supplier or manufacturer. We seek to leverage our collective scale and use the same suppliers for our brands, where possible, in order to obtain more favorable terms from our suppliers. Our network of third party suppliers allows us to be capital efficient and nimble, giving us the ability to move new designs we receive from our suppliers into production and then into inventory in as few as 30-45 days, as compared to up to 9 months for traditional apparel brands.
We strategically establish sourcing relationships to ensure a constant supply of high quality, low cost inventory with a number of our suppliers exclusively manufacturing for our brands. Although we have our own design team, a number of suppliers have the capability to produce concepts and designs with no obligation for our brands to purchase. With less seasonal demand for our products, we offer our manufacturing partners predictable and consistent growth in inventory purchases throughout the year.
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Customer Experience
A vast majority of our customers shop through our websites and mobile sites. Our websites and native mobile applications are designed to offer convenient navigation and feature editorial product pictures which facilitate product discovery and selection. Our brands’ websites and mobile platforms are based on responsive web design principles, which aim to make web pages render well on a variety of devices and window or screen sizes. These websites and mobile platforms employ technologies to create a compelling, easy-to-use shopping experience for our consumers.
Due to the high proportion of proprietary and exclusive products, we are able to standardize the sizing of our products, thereby providing better size consistency for customers. Our brands offer an interactive sizing tool and fit guides for customers, reducing the need to purchase the same styles in multiple sizes and returning the products that do not fit. Culture Kings and mnml serve customer bases consisting of primarily male customers, who tend to return merchandise less frequently. Across a.k.a. Brands, our return ratio was approximately 14% in fiscal year 2021, compared to the eCommerce average of approximately 30% according to Invesp, a consultancy specializing in conversion rate optimization, driving convenience for customers and cost savings on shipping and logistics for a.k.a.
We foster customer loyalty by offering a convenient customer experience and customer care services throughout the initial transaction, fulfillment, shipping and return processes. We have ten fulfillment centers and warehouses, five in Australia and five in the United States. Our customer service team, who interact with our customers primarily through email or instant-message, addresses questions relating to orders, deliveries and returns, and also answers questions regarding fit, color, size and other style matters to ensure customer satisfaction. Across our five websites, customers can use multiple payment methods and pay in multiple currencies. While we do not extend direct credit to our customers, we do offer third-party payment alternatives that allow our customers to make installment payments. Our inventory tracking system enables our customers to receive real-time updates regarding the status of their orders. We offer excellent customer service, fast shipping and easy returns to all of our customers and our efficient operations allow us to send a high percentage of orders on the same day, subject to certain cut-off times being met. For shipping to and from certain countries, we have worked with our delivery partners to create dedicated “shipping lanes” that have resulted in faster service and lower costs. We are also able to ship to and service customers almost anywhere in the world.
Our Marketing Approach
We grow brand awareness, acquire new customers and drive traffic through a combination of brand and performance marketing strategies which generate traffic through both unpaid and paid sources.
Brand Marketing
Our brands seek to create an authentic voice that resonates with our customers. We update our websites and social channels daily with a consistent flow of fresh and authentic editorial content created by our in-house team and our network of influencers to engage our customers and drive online traffic. We aim to be an early adopter of social media channels that our customers engage with by quickly adapting marketing strategies and producing channel-specific content. To date, we have built a community of over 8.7 million followers across multiple social media channels, including Instagram, Facebook, YouTube and TikTok.
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Princess Polly partners with an extensive network of approximately 11,000 influencers globally. The brand focuses on influencers with small and mid-sized followings, who tend to have an emotional connection with our brand and feature our products in an authentic way that resonates with our customers. In some cases, the brand partners with emerging influencers to create dedicated content for them to publish to their audience. The brand monitors the performance and effectiveness of its influencer network. We believe our influencer strategy not only creates a deeper relationship with our customers, but also diversifies the potential risk associated with individual celebrity or macro influencer endorsements. Leveraging learnings from Princess Polly, Culture Kings also began its own social media marketing program recently and has achieved early success.
Core to Culture Kings marketing strategy is their digital content and social media strategy surrounding their eight highly experiential retail stores in Australia and New Zealand. The stores feature a variety of public events and host creative activities that combine music, sports, art and fashion to engage our customers. The digital content created of the in-store events and gamification is piped out over social media, generating buzz and driving online traffic. We believe this event-driven and social media-led strategy cultivates a unique emotional connection and viral hype directly with the Culture Kings brand, not just the products it sells. Based on an internal customer survey conducted in November 2020, approximately 40% of Culture Kings customers in Australia made their first purchase after visiting a retail store.
Our recently introduced VIP and Loyalty programs focus on customer retention and drive increased customer lifetime value. Princess Polly’s loyalty program has already attracted over 1.4 million members since it launched in 2020. Through these programs we communicate directly with our top customers, providing them an exclusive experience with unique discounts, incentives, early product look features and access to events.
Unpaid Marketing
Our unpaid marketing sources can be characterized in two categories, organic and free channels. Organic traffic, which accounts for more than 60% of total traffic, is driven by direct traffic to our brands’ websites as well as customer discovery of our brands through organic search, our social media accounts and word of mouth, including other customers’ unpaid promotion of our brands on their social media accounts. We also generate traffic through other unpaid sources, which we characterize as free marketing, including personalized email marketing, SMS and mobile “push” communications through our apps. In 2021, unpaid traffic accounted for approximately 62% of total traffic.
Performance Marketing
While brand marketing is central to our marketing strategy, approximately 70-75% of our marketing expense is devoted to performance marketing efforts. We acquire and retain customers through retargeting, paid search/product listing ads, affiliate marketing and paid social. At Culture Kings, our Google analytics strategy allows us to efficiently list highly anticipated product drops. This strategy drives customer acquisition while we then largely focus retention efforts through our other marketing channels.
Our Technology Infrastructure
Our next-generation brands are built on a modern, flexible and scalable technology infrastructure which leverages a broad network of best-in-class, third-party technology providers. We then combine that customized presentation layer with the backend engine from Shopify, which is a proven and industry leading eCommerce solution. By pairing our own in-house technology with cloud software, we have been able to create a truly differentiated user experience that we can adjust as necessary while also leveraging engineering talent from some of the best SaaS companies in the world to scale rapidly and efficiently. Our cloud-based, SaaS native strategy allows us to adopt innovative, dynamic technology and capabilities with limited upfront investment and nimbly adopt market-leading technologies as they are introduced. We consider this to be a key differentiating factor compared to traditional retail proprietary technology stacks and for which switching to a more agile cloud-based SaaS solution could be too costly and risky.
Our technology infrastructure integrates seamlessly across our organization, connecting in a way that allows constant iteration and improvement. We leverage highly customizable solutions to provide customers optimal improved experiences, while limiting the costs and time required of custom bespoke solutions. This approach allows us to easily test new capabilities on a limited and low-cost basis, analyze and learn from the results, and then roll out more broadly if successful. We are leveraging our technology infrastructure to accelerate our scale and growth and drive efficiencies in areas spanning marketing, merchandising, customer experience, supply chain, operations and administration.
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People & Culture
We promote a holistic approach to building our team and have created a culture that is inclusive, diverse and high performing. We seek out and hire team members who bring specialized, functional expertise while able to collaborate effectively across brands, functions and geographies. Our culture is fast-paced, promotes accountability, empowers team members to drive the business forward daily, stresses a bias toward action and embraces the individuality of each team member.
Attracting, motivating and retaining passionate talent at all levels is vital to continuing our success. We actively look for talented people across multiple geographies and promote a “work from anywhere” approach, which allows us to maintain a lean physical footprint and employ offices as team collaboration hubs. We continuously work to improve the team member experience to drive retention and engagement. None of our employees are represented by a labor union or covered by a collective bargaining agreement. Our culture incents and rewards passionate, creative and results-oriented employees.
As of December 31, 2021, across a.k.a. Brands, we had more than 1,100 full-time employees. The majority of our workforce is located in Australia, with the remaining employees located throughout the United States. On a limited basis, we may use temporary personnel to supplement our workforce as business needs arise.
Competition
The online and offline retail markets generally are highly competitive and rapidly evolving. We face significant competition from eCommerce websites, including apparel- and accessories-oriented eCommerce websites as well as the eCommerce websites of traditional retailers. We also face competition from in-person stores and boutiques, including traditional retailers and fashion boutiques.
We compete based on product selection, differentiation, exclusivity, brand quality and strength of customer relationships, relevance, convenience, ease of use and consumer experience, including order fulfillment and shipping timelines. We believe we compete favorably across these factors taken as a whole.
Seasonality
We typically achieve our largest quarterly revenues in the fourth fiscal quarter. In fiscal year 2021, our net revenues in the first, second, third and fourth quarters represented 12%, 27%, 29% and 32%, respectively, of our total net revenues for the year. In fiscal year 2020, our net revenues in the first, second, third and fourth quarters represented 16%, 22%, 29% and 33%, respectively, of our total net revenues for the year. Revenues are typically higher during the months of November and December driven by higher holiday season spending.
Intellectual Property
We primarily protect our intellectual property through the trademark, copyright and trade secret laws of Australia and the United States. As of December 31, 2021, we owned approximately 470 trademark registrations, approximately 15 trademark applications and approximately 83 Internet domain names. Although we have not sought copyright registration for our technology or works to date, we rely on common law copyright and trade secret protections in relation to our proprietary technology, products and the content displayed on our websites, including our photography and fabric prints that we design. Our trademarks, including domain names, are material to our business and brand identity.
In addition to the protections provided by our intellectual property rights, we enter into confidentiality agreements with our employees, consultants, contractors and business partners. We further control the use of our technology and intellectual property through provisions in both our client terms of use on our website and in our vendor terms and conditions.
Sustainability and Responsible Fashion
a.k.a. Brands promotes sustainable, responsible and inclusive fashion and does so by focusing on four key areas: ethical sourcing, sustainable products, protecting the planet and equality and community.
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Ethical sourcing: we aim to promote a safe and respected environment for workers who make our products and protect their human rights. For example, in 2021 Princess Polly became a participant of the United Nations Global Compact, and aligned our Earth Club mission with the United Nations Sustainable Development Goals (SDGs). Princess Polly’s program is built on 6 dimensions (Human Rights Policy, Code of Conduct, Ethical Sourcing Guidelines, Child and Force Labour Policy, Manufacturing and Packaging Guidelines, and Animal Welfare Policy), and aims to create adherence with suppliers and awareness with customers. Princess Polly requires all suppliers to adhere to its Human Rights Policy and requires all production factories to register with the Supplier Ethical Data Exchange (SEDEX). We work closely with our manufacturing partners to ensure a high standard of working conditions. Currently, 100% of Princess Polly products are produced in factories that have a valid SEDEX Members Ethical Trade audit. Princess Polly is the leader in our portfolio on sustainability, and we will leverage their best practices and apply them to the rest of our portfolio. We are devoted to making continual progress towards our commitments and being transparent along the way.
Sustainable products: we design products that put people, animals and the planet first. To that end, we aim to use sustainable materials for our products. At Princess Polly we use six main materials in all products including polyester, cotton, viscose, metals, nylon and acrylic. We are committed to working with our supply chain to source lower-impact alternatives for each of these materials, and to certify our factories to create lower-impact products. As part of this initiative, in February 2021 we released our first Princess Polly Earth Club Edit made from lower-impact materials, including organically grown cotton and recycled polyurethane. We are aiming to have over 40% of our products made with lower-impact materials by the end of 2022.
Protect the planet: by promoting circularity and improving the environmental impact of our packaging, business operations and factories. Our business model limits waste generation in our supply chain. Our real-time, demand-driven and automated ordering system allows production to track demand as accurately as possible. This high velocity, low wastage strategy allows us to avoid wastefulness.
Equality and community: We are committed to instilling an inclusive culture and promoting diversity across our brands. As such, we aim to represent the diversity of our customers in our marketing and offer the right product to serve their unique demand. Our brands Rebdolls, Culture Kings address the traditionally underserved yet fast-growing markets of plus-size female and men’s fashion, respectively. Rebdolls carries sizes 0 to 32 and approximately 70% of its customers are Black. 56% of Culture Kings’ customers are men.
Government Regulation
Our business is subject to a number of domestic and foreign laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and could be interpreted in ways that could harm our business. These laws and regulations include federal and state consumer protection laws and regulations (including the General Data Protection Regulation in the European Union), which address, among other things, the processing of payments, privacy, data protection, information security, sending of commercial email and other laws regarding unfair and deceptive trade practices. We are also subject to laws and regulations governing the accessibility of our websites, including under the Americans with Disabilities Act.
Our business is also subject to additional laws and regulations, including restrictions on imports from, exports to, and services provided to persons located in certain countries and territories, as well as foreign laws and regulations addressing topics such as advertising and marketing practices, customs duties and taxes and consumer rights, any of which might apply by virtue of our operations in foreign countries and territories or our contacts with consumers in such foreign countries and territories.
In addition, apparel, shoes and accessories sold by us are also subject to regulation by governmental agencies in Australia, New Zealand and the United States, as well as various other federal, state, local and foreign regulatory authorities. These laws and regulations principally relate to the materials, proper labeling, advertising, marketing, manufacture, licensing requirements, flammability testing, safety, shipment and disposal of our products. We are also subject to laws, rules and regulations relating to the operations of our stores and warehouses.
We are also subject to environmental laws, rules and regulations. Similarly, apparel, shoes and accessories sold by us are also subject to import regulations in the United States and other countries concerning the use of wildlife products for commercial and non-commercial trade. We do not estimate any significant capital expenditures for environmental control matters either in the current fiscal year or in the near future.
For more information about laws and regulations applicable to our business, see “Risk Factors–Risks Relating to Laws and Regulation.”
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ITEM 1A. RISK FACTORS
Investing in our common stock involves a number of risks. Before you purchase our common stock, you should carefully consider the risks described below and the other information contained in this Annual Report on Form 10-K, including our condensed consolidated financial statements and accompanying notes. If any of the following risks actually occurs, our business, prospects, financial condition, results of operation or cash flows could be materially adversely affected and the factors that we identify as risks to a particular aspect of our business could materially affect another aspect of our business or the company as a whole. The risks below are not the only risks we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially affect our business, prospects, financial condition, results of operation or cash flows. In any such case, the trading price of our common stock could decline, and you could lose all or part of your investment.
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties that you should consider before investing in our common stock. The following is a summary of some of these risks and uncertainties. This summary should be read together with the more detailed description of each risk factor below.
•The recent coronavirus (COVID-19) global pandemic has adversely affected, and could in the future
materially adversely affect, our business, financial condition and results of operations;
•Rapidly-changing consumer preferences in the apparel, footwear and accessories industries expose us to the risk of lost sales, harmed customer relationships and diminished brand loyalty if we are unable to anticipate such changes;
•Our future revenues and operating results will be harmed if we fail to acquire new customers, retain existing customers, and maintain average order value levels;
•We face risks related to our growth strategy if we are unsuccessful in identifying brands to acquire, integrate and manage on our platform;
•Our business and the success of our products could be harmed if we are unable to maintain our corporate integrity or the images and reputations of our brands;
•Economic downturns and market conditions could materially adversely affect our business, operating results, financial condition and growth prospects;
•Our use of third-party suppliers and manufacturers that are primarily based in China exposes us to risks inherent in doing business there;
•We face risks to our operating results if we fail to manage our inventory effectively;
•Increases in labor costs, including wages, and transportation costs could adversely affect our business, financial condition and results of operations;
•We may not realize all of the anticipated benefits of the Culture Kings acquisition in the expected time frame or at all;
•Changes in laws or regulations relating to data privacy and security that are applied adversely to us may have a material adverse effect on our reputation, results of operations, financial condition and cash flows; and
•Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
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Risks Relating to COVID-19
The coronavirus (COVID-19) global pandemic has caused, and may continue to cause significant disruption in our industry, which has and may continue to materially impact our business, financial condition and results of operations.
Our business has been, and may continue to be, impacted by the effects of the COVID-19 global pandemic, including as a result of new variants. The pandemic significantly increased economic and demand uncertainty globally and caused record levels of unemployment in the U.S. and abroad. The economic uncertainty of the COVID-19 pandemic has led to volatility in consumer spending and a decrease in consumer confidence. Our revenue, results of operations and cash flows depend on the overall demand for our product.
We believe that the volatility of consumer demand during the pandemic was mitigated in part by the stay-at-home restrictions imposed in connection with the COVID-19 pandemic and the temporary closures of many traditional brick-and-mortar stores, which we believe shifted consumer spending patterns towards online retailers like us. As the offline economy continues to reopen and governmental and other restrictions on movement and travel lessen, we may not continue to benefit from this trend toward online shopping. It is difficult to ascertain with precision how much of our growth is attributable to the impact of those stay-at-home restrictions, and there can be no assurances that these positive trends during the COVID-19 pandemic will be sustained through the remainder of the pandemic or in the future. If the positive impacts of the COVID-19 pandemic on our business are not sustained through the remainder of the pandemic or in the future, or if customers’ purchases decline more than expected, our results of operations would be adversely impacted.
In addition, some of our customers have experienced and may continue to experience financial hardships, which may adversely impact demand for our products. Mandates from governmental authorities abroad, including in Australia and China, to close businesses, limit travel and transportation, avoid large gatherings or to self-quarantine, as well as temporary closures and decreased operations at our suppliers’ facilities, have negatively impacted our business and may continue to negatively impact our business in the future, and statements by certain governmental authorities suggest that such mandates may continue to reoccur for an indefinite period of time. Approximately 39% and 31% of our net sales for the years ended December 31, 2021 and 2020, respectively, were derived from sales to customers in Australia. Our third-party suppliers and manufacturers are based primarily in China, which has imposed and we believe will continue to impose widespread business closures in connection with the COVID-19 pandemic. As a result, any ongoing mandates in Australia and China in particular could adversely impact our results of operations.
During the COVID-19 pandemic, we have implemented a number of measures designed to protect the health and safety of our workforce and position us to maintain our healthy financial position. These measures include restrictions on non-essential business travel, the institution of work-from-home policies and the implementation of strategies for workplace safety at our offices and facilities. We are following the guidance from public health officials and government agencies with respect to such facilities, including implementation of enhanced cleaning measures and social distancing guidelines.
We may continue to incur increased costs for our operations during this pandemic that are difficult to predict with certainty. As a result, our business, results of operations, cash flows or financial condition may be affected and could continue to be adversely impacted in the future. There is no assurance the measures we have taken or may take in the future will be successful in managing the uncertainties caused by the COVID-19 pandemic. Governmental measures to try to contain the virus have impacted and may further impact all or portions of our workforce and operations, the behavior of our customers and the operations of our respective suppliers. There is no certainty that measures taken by us or by governmental authorities will be sufficient to mitigate the risks posed by the COVID-19 pandemic, and our ability to perform critical functions could be harmed.
The future impact of the COVID-19 pandemic will depend on a number of factors, which are highly uncertain and cannot be predicted, including, but not limited to, the duration of the pandemic, the resurgence of cases, the acceptance and effectiveness of vaccines, new variants, effects of the outbreak on our customers and suppliers and the measures adopted by local and federal governments. To add to the uncertainty, the nature and rate of any economic recovery and any ongoing effects on consumer demand and spending patterns is unclear. For instance, any increases in consumer discretionary spending related to government stimulus programs may be temporary, and consumer spending may decrease again if the government does not continue such stimulus programs. All of these factors could have a negative impact on our revenue, cash flows and results of operations and could have the effect of heightening many of the other risks described in this “Risk Factors” section.
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Risks Relating to Our Business and Strategy
The apparel, footwear and accessories industries are subject to rapid changes in consumer preferences, and if we do not accurately anticipate and promptly respond to changes in consumer preferences, we could lose sales, our relationships with customers could be harmed and our brand loyalty could be diminished.
The apparel, footwear and accessories industries are subject to rapid changes in consumer preferences and tastes, which can make it difficult to anticipate demand for our products and forecast our financial results. We believe there are many factors that may affect the demand for our products, including:
•seasonality, including the impact of anticipated and unanticipated weather conditions;
•consumer acceptance of our existing products and acceptance of our new products, including our ability to develop new products that are private label or exclusive;
•consumer demand for products of our competitors;
•consumer perceptions of and preferences for our products and brands, including as a result of evolving ethical or social standards;
•the extent to which consumers view certain of our products as substitutes for other products we manufacture;
•publicity, including social media, related to us, our products, our brands, our marketing campaigns and our influencer endorsers;
•the life cycle of our products and consumer replenishment behavior;
•evolving fashion and lifestyle trends, and the extent to which our products reflect these trends;
•brand loyalty; and
•changes in consumer confidence and buying patterns, and other factors that impact discretionary income and spending.
Consumer demand for our products depends in part on brand loyalty and the continued strength of our brands, which in turn depend on our ability to anticipate, understand and promptly respond to the rapidly changing preferences and fashion tastes for apparel, footwear and accessories, as well as consumer spending patterns. As our brands and product offerings continue to evolve, it is necessary for our products to appeal to an even broader range of consumers whose preferences cannot be predicted with certainty. For example, many of our products include a fashion element and could go out of style quickly. Furthermore, we are dependent on consumer receptivity to our new products and to the marketing strategies we employ to promote those products. Consumers may not purchase new models and styles of apparel, footwear and accessories in the quantities projected or at all. If we fail to predict or react appropriately to changes in consumer preferences and fashion trends or fail to adapt to shifting spending patterns or demand, consumers may consider our brands and products to be outdated or unattainable or associate our brands and products with styles that are no longer popular, which may adversely affect our overall financial performance.
If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to increase net sales or maintain profitability.
Our success depends on our ability to acquire customers in a cost-effective manner. In order to expand our customer base, we must appeal to and acquire customers who have historically used other means of commerce in shopping for apparel and may prefer alternatives to our offerings, such as traditional brick-and-mortar retailers or the websites of our competitors. If we fail to deliver a quality online experience, or if consumers do not perceive the products we offer to be of high value and quality, we may not be able to acquire new customers. Our marketing strategy includes using social media platforms as marketing tools and maintaining relationships with social media influencers. As social media platforms continue to rapidly evolve and new platforms develop we must continue to maintain a presence on these platforms and establish a presence on new or emerging social media platforms. If marketing through social media influencers becomes less effective at engaging new customers, our ability to drive new growth may be negatively impacted, and marketing costs may increase materially, which would negatively impact sales and margins. We also seek to engage with our customers and build awareness of our brands through sponsoring unique events and experiences. These events may fail to promote awareness of our brands and products and may not generate a meaningful return on investment.
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We also acquire and retain customers through retargeting, paid search and product listing ads, affiliate marketing, paid social, personalized email marketing, SMS text and mobile “push” communications through our mobile apps. Search engines frequently change the algorithms that determine the ranking and display of results of a user’s search and may make other changes to the way results are displayed, or may increase the costs of advertising, which can negatively affect the placement of our links and, therefore, reduce the number of our visits to our websites and social media channels, or make such marketing cost prohibitive. In addition, social media platforms typically require compliance with their privacy policies, which may be subject to change or new interpretation with limited ability to negotiate. If we are unable to cost-effectively use on-line marketing tools or if the social media platforms we use change their policies or algorithms, we may not be able to cost-effectively drive traffic to our websites, and our ability to acquire new customers could suffer. Conversely, if these on-line marketing tools are successful in driving traffic to our sites, they could cause the “runaway promo code effect” of pricing and promotional errors that are amplified by the wide dissemination to a larger consumer audience, which could adversely impact our operating results. If our marketing efforts are not successful in promoting awareness of our brands and products, driving customer engagement or attracting new customers, or if we are not able to cost-effectively manage our marketing expenses, our operating results will be adversely affected.
If we fail to retain existing customers, or fail to maintain average order value levels, we may not be able to maintain our revenue base and margins, which would have a material adverse effect on our business and operating results.
A significant portion of our net sales are generated from sales to existing customers, particularly those existing customers who are highly engaged and make frequent purchases of the merchandise we offer. If existing customers no longer find our offerings appealing, or if we are unable to timely update our offerings to meet current trends and customer demands, our existing customers may make fewer or smaller purchases in the future. A decrease in the number of our customers who make repeat purchases or a decrease in their spending on the merchandise we offer could negatively impact our operating results. Further, we believe that our future success will depend in part on our ability to increase sales to our existing customers over time, and if we are unable to do so, our business may suffer. If we fail to generate repeat purchases or maintain high levels of customer engagement and average order value, our growth prospects, operating results and financial condition could be materially adversely affected.
Our business depends on effective marketing and high customer traffic.
We have many initiatives in our marketing programs particularly with regard to our websites, mobile applications and our social media presence. If our competitors increase their spending on marketing, if our marketing expenses increase, if our marketing becomes less effective than that of our competitors, or if we do not adequately leverage technology and data analytics capabilities needed to generate concise competitive insight, we could experience a material adverse effect on our results of operations. Among other factors, (1) a failure to sufficiently innovate or maintain effective marketing strategies and (2) U.S. and foreign laws and regulations that make it more difficult or costly to digitally market, such as the European Union General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act of 2018 (“CCPA”), may adversely impact our ability to maintain brand relevance and drive increased sales.
Merchandise returns could harm our business.
We allow our customers to return products, subject to our return policy. If the rate of merchandise returns increases significantly or if merchandise return economics become less efficient, our business, financial condition and operating results could be harmed. Further, we may modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of product returns. From time to time our products are also damaged in transit, which can increase return rates and harm our brand.
We may be unsuccessful in identifying brands to acquire and in integrating and managing our acquisitions and investments to expand the number of brands on our platform.
We have acquired five businesses to date, and we intend to acquire or invest in additional companies to increase the number of brands in our platform. Any such business acquisitions and investments could be significant and could have a material impact on our business, financial condition and results of operations. We regularly identify and evaluate potential business acquisitions and investments, and we typically have a pipeline of acquisition and investment opportunities of different stages of evaluation. There are numerous risks associated with our acquisition strategy, including:
•our inability to identify appropriate candidates for acquisition;
•competition for acquisition targets driving up purchase prices;
•disruption of our ongoing business, including loss of management focus on existing businesses;
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•problems retaining key personnel;
•unanticipated operating losses and expenses of the businesses we acquire or in which we invest;
•risks of losing a target company’s customer and other relationships;
•the difficulty of completing acquisitions or investments and achieving anticipated benefits within expected timeframes, or at all;
•the difficulty of integrating acquired brands on our platform, and unanticipated expenses related to their integration;
•the difficulty of integrating another company’s accounting, financial reporting, management, information and data security, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not successfully implemented;
•losses we may incur as a result of declines in the value of an acquisition or an investment or as a result of incorporating its financial performance into our financial results, and our dependence on its accounting, financial reporting, systems, controls and processes;
•the risks associated with businesses we acquire or invest in, which may differ from or be more significant than the risks our existing businesses face;
•potential unknown, unidentified or undisclosed liabilities or risks associated with a company we acquire or in which we invest; and
•for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political and regulatory risks associated with specific countries.
We are evaluating multiple opportunities for such acquisitions in the near term. We are not party to any definitive agreements in respect of any such acquisition targets, but it is possible discussions relating to one or more of these potential acquisitions could advance and it is possible we could sign or complete any such transactions shortly after we complete this filing. We cannot assure you that we will become a party to any definitive agreements to consummate a transaction, or that if we do become a party to such agreements that we will be able to close the transactions and acquire the relevant target company.
In order to fund future acquisitions or investments, we expect need to issue additional equity securities, spend our cash or incur debt, which may only be available on unfavorable terms, if at all. Any such financing to fund future acquisitions or investments may change our leverage profile, potentially significantly.
In addition, any shares of our common stock or other equity linked securities that we issue in connection with an acquisition or investment could constitute a material portion of our then-outstanding shares of common stock, which could adversely affect the price of our common stock and result in significant dilution to your ownership interest. In addition, valuations supporting our acquisitions and strategic investments could change rapidly. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results. We may record contingent liabilities and amortization expenses related to intangible assets as a result of acquisitions. Our growth prospects are dependent on our ability to identify and acquire additional brands and integrate them on our platform, and our failure to do so may negatively impact our future growth and, as a result, our results of operations.
We may not succeed in our growth strategy.
One of our key strategic objectives is growth, which we pursue organically and through acquisitions. In particular, we seek to grow by attracting new fashion brands to our platform, winning new customers to expand our market share, marketing our brands in new regions, building on economies of scale, leveraging our supply chain and information technology capabilities across our company, expanding our direct-to-consumer business and growing our eCommerce business. However, we may not be successful in growing our business. For example:
•we may have difficulty completing acquisitions to expand our platform, and we may not be able to successfully integrate a newly acquired business or achieve the expected growth, cost savings or synergies from such integration, or it may disrupt our current business;
•we may not be able to continue to evolve to meet our customers’ changing needs and expectations, and our existing customers may reduce their purchases of our products;
•we may not successfully expand our market share by winning new customers;
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•our brands may not be widely accepted in new countries or regions;
•we may have difficulty recruiting, developing or retaining qualified employees;
•we may not be able to manage our growth effectively, adapt our business model or develop relationships with customers or successfully operate our recently acquired Culture Kings stores;
•we may not be able to scale the abilities of our supply chain operations to meet increased consumer demand, and we may not be able to offset rising materials, procurement and shipping costs with pricing actions or efficiency improvements;
•any new brands we acquire might cannibalize our existing brands and cause a decrease in sales of our existing brands; and
•we may not be able to complete dispositions of nonstrategic assets in the future.
We are also required to manage numerous relationships with various suppliers, vendors and other third parties. Changes in our suppliers, vendor base, distribution centers, information technology systems or internal controls and procedures may not be adequate to support our operations. If we are unable to manage the growth of our organization effectively, our business, financial condition and operating results may be adversely affected. If we fail to continue to develop and grow our business, our financial condition and results of operations and the value of your investment may be materially adversely affected.
Our growth plan contemplates expansion into new markets, and our efforts to expand may ultimately be unsuccessful.
Our growth plan includes introducing our brands globally, including in countries and regions where we have no or limited operating experience. Expanding into new countries and regions involves significant risk, particularly if we have no experience in marketing, selling and engaging with customers in the market. For example, there is no guarantee that the success of a brand in Australia will translate to the success of that brand in other countries, such as the U.S. Our efforts to expand into new countries and regions could fail for many reasons, including our failure to accurately or timely identify apparel trends in new markets, different consumer demand dynamics and lack of acceptance of new offerings by existing or new users, our failure to promote the new markets effectively or negative publicity about us or our new markets. In addition, these initiatives may not drive increases in revenue, may require substantial investment and planning and may bring us more directly into competition with companies that are better established, operate more effectively or have greater resources than we do. There is additional complexity associated with local laws, tariffs and shipping logistics in new countries where our brands do not have an established presence. Expanding into new markets will require additional investment of time and resources of our management and personnel. If we are unable to cost-effectively expand into new countries and regions, then our growth prospects and competitive position may be harmed and our business, results of operations, and financial condition may suffer.
We face risks from our international business.
Our current growth strategy includes plans to expand our digital marketing and grow our eCommerce and retail presence internationally over the next several years. As we seek to expand internationally, we face competition from more established retail competitors. Consumer demand and behavior, as well as cultures, and tastes and purchasing trends, may differ, and as a result, sales of our merchandise may not be successful, or the margins on those sales may not be in line with our expectations. Our ability to conduct business internationally may be adversely impacted by geopolitical (such as the recent outbreak of hostilities between Russia and Ukraine), economic, and public health events, such as the COVID-19 pandemic, the manner in which governments respond to such events, as well as the global economy. Any challenges that we encounter as we expand internationally may divert financial, operational and managerial resources from our existing operations, which could adversely impact our financial condition and results of operations.
We face risks associated with the potential uncertainty and disruptions relating to the United Kingdom’s withdrawal from the European Union (“Brexit”), including the risk of additional regulatory and other costs and challenges or limitations on our ability to sell particular products. In particular, these uncertainties may affect the viability of our operations through compliance with changing regulatory and disclosure requirements, re-determining our importation policies, and regulations regarding subsidies of consumer-facing taxes. Although the United Kingdom and the European Union negotiated a post-Brexit trade agreement, which went into effect on January 1, 2021, the ongoing uncertainty surrounding Brexit could have a material adverse effect on our business (including our European growth plans), results of operations, financial condition and cash flows.
In addition, we are increasingly exposed to foreign currency exchange rate risk with respect to our revenue, profits, assets and liabilities denominated in currencies other than the U.S. dollar.
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Shipping is a critical part of our business and any interruptions in, or increased costs of, shipping could adversely affect our operating results.
We currently rely on third-party vendors for our inbound and outbound customer freight. If we are not able to negotiate acceptable pricing and other terms with these vendors or they experience operational problems or other difficulties, our customers’ experience could be negatively impacted. For example, shipping delays could delay delivery of products to our customers and increase the time it takes to process customer returns. Our ability to receive inventory and ship merchandise to customers may be negatively affected by weather, fire, flood (such as the recent flood in northeastern Australia), power loss, earthquakes, public health crises such as the COVID-19 pandemic, labor disputes, acts of war or terrorism, port closures, import and export tariffs, complex local laws and other factors. Reduced air traffic during the COVID-19 pandemic resulted in reduced cargo capacity on airplanes, which intensified the demand for shipping services and increased their prices. In 2021, we also experienced meaningful delays and unpredictability with sea freight transportation, resulting in increased reliance on air freight transportation. We expect the ongoing impact of the pandemic to continue to result in reduced cargo capacity on airplanes and delayed transportation by sea, and as a result we expect increased demand and prices for shipping services to continue. While we have been able to offset increased shipping prices to some extent, there can be no assurance that we will continue to be able to do so, or that prices for shipping services will not increase to a level that does not permit us to do so. In addition, in response to the COVID-19 pandemic, we operated, and expect to continue to operate, our U.S. and Australian distribution centers at reduced capacity and limited throughput for a period of time, which puts more pressure on delivery times. In the past, strikes at and closures of major international shipping ports have impacted our supply of inventory from our vendors. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our merchandise is not delivered in a timely manner or is damaged or lost during the delivery process, our consumers could become dissatisfied and cease purchasing our products, which would adversely affect our business and operating results.
Our direct-to-consumer business model is subject to risks that could have an adverse effect on our results of operations.
We sell merchandise direct-to-consumer through our eCommerce sites. Our direct-to-consumer business model is subject to numerous risks that could have a material adverse effect on our results. Risks include, but are not limited to, (i) resellers purchasing private label and exclusive merchandise and reselling it outside of authorized distribution channels, (ii) failure of the systems that operate our eCommerce websites, and their related support systems, including computer viruses, (iii) theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions, (iv) credit card fraud and (v) risks related to our supply chain and fulfillment operations. Risks specific to operating an eCommerce business also include (i) the ability to optimize the online experience and direct eCommerce channels to consumer needs, (ii) liability for copyright and trademark infringement, (iii) changing patterns of consumer behavior and (iv) competition from other eCommerce and brick-and-mortar retailers. Our failure to successfully respond to these risks might adversely affect our sales, as well as damage our reputation and brands.
Use of social media and influencers may materially and adversely affect our reputation or subject us to fines or other penalties.
We use third-party social media platforms as, among other things, marketing tools. For example, our brands maintain Instagram, Facebook, YouTube and TikTok accounts. We also maintain relationships with many social media influencers and engage in sponsorship initiatives. As existing eCommerce and social media platforms continue to rapidly evolve and new platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we use change their policies or algorithms, we may not be able to fully optimize such platforms, and our ability to maintain and acquire customers and our financial condition may suffer. Furthermore, as laws, regulations, policies governing platforms and public opinion rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers or third parties acting at our direction to abide by applicable laws, regulations and policies in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and operating results.
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Our relationships with social media influencers and our sponsorship initiatives do not include any contractual commitments that they continue to be supportive of our brands or products, and there can be no assurance that they will continue to do so. For example, changes in fashion trends, consumer sentiment or public perceptions of our brands could adversely impact our relationships with social media influencers. Any negative publicity created by a social media influencer or participant in a sponsorship initiative who we formerly engaged or who is no longer supportive of our brands may reduce our sales, and may mean that we become more reliant on paid advertising and other paid promotions. The costs to enter into relationships with social media influencers or engage in sponsorship initiatives may also increase over time, which may also negatively impact our margins and results of operations.
In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. For example, in some cases, the FTC has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser. We do not prescribe what our influencers post, and if we were held responsible for the content of their posts or their actions, we could be fined or forced to alter our practices, which could have an adverse impact on our business.
Negative commentary regarding us, our products or influencers who promote our brands and other third parties who are affiliated with us may also be posted on social media platforms and may be adverse to our reputation or business. Influencers with whom we maintain relationships could engage in behavior or use their platforms to communicate directly with our customers in a manner that reflects poorly on our brand and may be attributed to us or otherwise adversely affect us. Any such negative commentary could drive large-scale social movements against us, our products, or our brands and result in customer boycotts. It is not possible to prevent such behavior, and the precautions we take to detect this activity may not be effective in all cases. Consumers often value readily available information and may act on such information without further investigation and without regard to our accuracy. The harm may be immediate, without affording us an opportunity for redress or correction.
If our operating results differ significantly from our expectations or the expectations of securities analysts or investors, our stock price may decline.
If we fail to achieve our projected results or to meet the expectations of securities analysts or investors, our stock price may decline, and the decrease in the stock price may be disproportionate to the shortfall in our financial performance. Our short operating history as a holding company with a portfolio of newly acquired brands, and our continuing evolution as we acquire and integrate brands and enter new markets, may negatively affect our ability to forecast our consolidated operating results. If our future operating results are below the expectations of securities analysts or investors, or below any financial guidance we may provide to the market, our stock price may decline.
Our operating results fluctuate from period to period.
Our business experiences seasonal fluctuations in shipping rates, consumer demand, net sales and operating income, with a significant portion of net income typically realized in the spring and summer seasons. Historically, and consistent with the retail industry, this seasonality also impacts our working capital requirements, particularly with regard to inventory. Any decrease in sales or gross profit during this period, or in the availability of working capital needed in the months preceding this period, could have a more material adverse effect on our business, financial condition and results of operations than in other periods. Seasonal fluctuations also affect our inventory levels, as we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday selling periods. We must also carefully plan our inventory around Chinese New Year when inventory supply is constrained and materials and inbound freight costs are higher. If we are not successful in managing our inventory or fail to execute on our strategy, we may be forced to rely on markdowns or promotional sales to dispose of the excess inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business, financial condition and results of operations.
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Certain of our key operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.
We track certain key operating metrics using internal data analytics tools, which have certain limitations. In addition, we rely on data received from third parties, including third-party platforms, to track certain performance indicators. Data from both such sources may include information relating to fraudulent accounts and interactions with our sites or the social media accounts of our influencers (including as a result of the use of bots, or other automated or manual mechanisms to generate false impressions that are delivered through our sites or their accounts). We have only limited abilities to verify data from our sites or third parties, and perpetrators of fraudulent impressions may change their tactics and may become more sophisticated, which would make it still more difficult to detect such activity.
Our methodologies for tracking metrics may also change over time, which could result in changes to the metrics we report. If we undercount or overcount performance due to the internal data analytics tools we use or issues with the data received from third parties, or if our internal data analytics tools contain algorithmic or other technical errors, the data we report may not be accurate or comparable with prior periods. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies. If our performance metrics are not accurate representations of the reach or monetization of our brand, if we discover material inaccuracies in our metrics or the data on which such metrics are based, or if we can no longer calculate any of our key performance metrics with a sufficient degree of accuracy and cannot find an adequate replacement for the metric, our business, financial condition and operating results could be adversely affected.
Our business and the success of our products could be harmed if we are unable to maintain our corporate integrity or the images and reputation of our brands.
Our success to date has been due in large part to the growth of our brands’ images and our customers’ connection to our brands. If we are unable to timely and appropriately respond to changing consumer demands, the names and images of our brands may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brands’ images to be outdated or associate our brands with styles that are no longer popular.
In addition, brand value is based in part on consumer sentiment about merchandise quality and corporate integrity, including our ability to operate responsibly through our commitment to responsible fashion and sustainability. A perception that introducing a high volume of styles and manufacturing and selling of fast fashion at scale results in lower quality or increased textile waste, or that we are not honoring our commitment to responsible fashion, could harm our reputation. Our reputation could also be adversely affected by negative consumer perception of our sourcing concentration in particular countries.
Negative perceptions of our product quality, product design, product components or materials or customer service could harm our brand loyalty and the value of our business. The unauthorized resale of our merchandise outside of approved distribution channels, sales of counterfeit items on third-party websites and similar deviations from the brand identity could negatively affect consumers’ perception of our products and harm our reputation. In addition, negative claims or publicity regarding us, our products, our brands, our marketing campaigns, or our influencer endorsers, could adversely affect our reputation and sales regardless of whether such claims are accurate. Social media, which accelerates the dissemination of information, can increase the challenges of responding to negative perceptions or claims. In the past, many apparel companies have experienced periods of rapid growth in sales and earnings followed by periods of declining sales and losses. Our businesses may be similarly affected in the future. In addition, we have sponsorship contracts with a number of influencers and feature those individuals in our advertising and marketing efforts. Failure to continue to obtain or maintain high-quality sponsorships and endorsers could harm our business. In addition, actions taken by social media influencers or celebrity endorsers that harm their own reputations could adversely affect the images of our brands by association. If consumers begin to have negative perceptions of our brands, whether or not warranted, our brand image would become tarnished and our products would become less desirable, which could have a material adverse effect on our business.
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Our brand depends on the promotion of diversity and equality and the ability to promote responsible fashion from an ethically- and sustainably-sourced supply chain. If we are unable to do so, damage to our brand and reputation could result or we may fail to expand our brand which would harm our business and results of operations.
Our customers and employees are increasingly focused on environmental, social and governance or “sustainability” practices. We will depend significantly on building and maintaining our brand and reputation for promoting diversity and equality and responsible fashion from an ethically- and sustainably-sourced supply chain to attract customers and employees and grow our business. If we are unable, for instance, to prioritize transparency among our employees, appropriately enforce fair labor practices, obtain our materials from ethical and sustainable suppliers or reduce waste, our brand and reputation could be significantly impaired, which could adversely affect our business, results of operations and financial condition. Customer values could shift faster than we are able to adjust our merchandise proposition. For example, weather impacts from global warming could continue to intensify and fuel increased customer sentiment for apparel that is more sustainably produced. While we are increasing our mix of sustainable fabrics, it may not be fast enough to keep up with a rapidly shifting customer sentiment and value system that is being accelerated by the impacts of global warming. If we are unable to evolve with our customers’ and employees’ expectations and standards, our brand, reputation and customer and employee retention may be negatively impacted.
We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our consumers would have to pay for our offering and adversely affect our operating results.
In general, we have not historically collected state or local sales, use or other similar taxes in any jurisdictions in which we do not have a tax nexus, in reliance on court decisions or applicable exemptions that restrict or preclude the imposition of obligations to collect such taxes with respect to online sales of our products. In addition, we have not historically collected state or local sales, use or other similar taxes in certain jurisdictions in which we do have a physical presence, in reliance on applicable exemptions. On June 21, 2018, the U.S. Supreme Court decided, in South Dakota v. Wayfair, Inc., that state and local jurisdictions may, at least in certain circumstances, enforce a sales and use tax collection obligation on remote vendors that have no physical presence in such jurisdiction. A number of states have already begun, or have positioned themselves to begin, requiring sales and use tax collection by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state. While we now collect, remit and report sales tax in all states that impose a sales tax, it is still possible that one or more jurisdictions may assert that we have liability for previous periods for which we did not collect sales, use or other similar taxes, and if such an assertion or assertions were successful it could result in substantial tax liabilities, including for past sales taxes and penalties and interest, which could materially adversely affect our business, financial condition and operating results.
Economic downturns and market conditions beyond our control, including periods of inflation, could materially adversely affect our business, operating results, financial condition and prospects.
Our business depends on global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment; higher consumer debt levels; reductions in net worth, declines in asset values and related market uncertainty; home foreclosures and reductions in home values; fluctuating interest rates and credit availability; fluctuating fuel and other energy costs; fluctuating commodity prices; inflationary pressure and general uncertainty regarding the overall future political and economic environment. Global economic conditions may continue to be uncertain, particularly in light of the impact of the COVID-19 pandemic and related responses, and the potential impacts of increasing inflation in the United States (our largest market) remain unknown, making trends in consumer demand unpredictable. Economic conditions in certain regions may also be affected by natural disasters, such as hurricanes, tropical storms, earthquakes and wildfires; other public health crises; and other major unforeseen events. Consumer purchases of discretionary items, including the merchandise that we offer, generally decline during recessionary periods, periods of inflation or periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. Economic downturns or unstable market conditions may also cause customers to decrease their budgets, which could reduce their spending on our products and adversely affect our business, financial condition and results of operations. As we explore new countries to expand our business, economic downturns or unstable market conditions in any of those countries could result in our investments not yielding the returns we anticipate.
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Our business is exposed to the risks of foreign currency exchange rate fluctuations.
Our international businesses operate in functional currencies other than the U.S. dollar. A growing percentage of our total revenues (approximately 52% in 2021) is derived from markets outside the U.S. Changes in currency exchange rates affect the U.S. dollar value of prices at which we purchase products and incur costs outside the U.S. In addition, for most of our brands, the majority of products are sourced from suppliers located in China. Changes in foreign currency exchange rates could have an adverse impact on our financial condition, results of operations and cash flows.
We are also exposed to currency translation risk because the results of our Australian businesses are generally reported in local currency, which we then translate to U.S. dollars for inclusion in our financial statements. As a result, exchange rate changes between foreign currencies and the U.S. dollar affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We expect that our exposure to foreign currency exchange rate fluctuations will grow as the relative contribution of our non-U.S. operations increases.
We may be adversely affected by weather conditions.
Our business is adversely affected by unseasonable weather conditions. A significant portion of the sales of our products is dependent in part on the weather and is likely to decline in years in which weather conditions do not favor the use of these products. For example, periods of unseasonably warm weather in the fall or winter can lead to reduced consumer spending that negatively impacts our business, which can, in turn, negatively affect orders in future seasons. In addition, abnormally harsh or inclement weather can also negatively impact consumer spending. Any and all of these risks may have a material adverse effect on our financial condition, results of operations or cash flows.
If we fail to retain key personnel or attract additional qualified personnel, effectively manage succession or hire, develop, and motivate our employees, our business, financial condition, and operating results could be adversely affected.
Our success, including our ability to effectively anticipate and respond to changing style trends, depends in part on our ability to retain key personnel and attract additional qualified personnel for our executive team and on our merchandising, marketing and other teams.
Because of our short tenure as a holding company, our senior management team has limited history working together at a.k.a. Brands. We have also experienced changes in the composition of our senior management. We do not have long-term employment with any of our personnel, including our brand founders, and only have limited non-compete agreements for a term of fewer than three years. Senior employees have left us in the past and others may in the future, which we cannot necessarily anticipate and whom we may not be able to promptly replace. The loss of one or more of our key personnel or the inability to promptly identify a suitable successor to a key role could have an adverse effect on our business. Further, if any of our brand founders or other key personnel leave to join or create competing brands, our business may suffer additional adverse consequences. We do not currently maintain key-person life insurance policies on any member of our senior management team or other key employees.
We also face significant competition for personnel. To attract top talent, we have had to offer, and believe we will need to continue to offer, competitive compensation and benefits packages before we can validate the productivity of those employees. We may also need to increase our employee compensation levels in response to competition. We cannot be sure that we will be able to attract, retain and motivate a sufficient number of qualified personnel in the future, or that the compensation costs of doing so will not adversely affect our operating results. In addition, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs or successfully integrate new hires, our efficiency, ability to meet forecasts, and employee morale, productivity and retention could suffer, which may have an adverse effect on our business, financial condition and operating results.
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Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.
Labor is a significant portion of our cost structure and is subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in California and a number of other states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our sales. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline and could have a material adverse effect on our business, financial condition and results of operations.
Fluctuations in wage rates and the price, availability and quality of raw materials and finished goods could increase costs.
Fluctuations in the price, availability and quality of fabrics, leather or other raw materials used by us in our manufactured products, or of purchased finished goods, could have a material adverse effect on our cost of goods sold or our ability to meet our customers’ demands. The prices we pay depend on demand and market prices for the raw materials used to produce them. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including general economic conditions and demand, energy prices, weather patterns and public health issues, such as the current COVID-19 pandemic. Increased demand for raw materials with a limited supply, such as sustainably harvested cotton, could negatively impact our ability to meet our customers’ demands for certain products. Prices of purchased products also depend on wage rates in China and other geographic areas where our suppliers are located, as well as shipping and freight costs from those regions. Inflation can also have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. Similarly, a significant portion of our products are manufactured in China, and declines in the value of the U.S. dollar may result in higher reported procurement costs. In the future, we may not be able to offset cost increases with other cost reductions or efficiencies or to pass higher costs on to our customers. This could have a material adverse effect on our results of operations, liquidity and financial condition.
Our third-party suppliers and manufacturers are based primarily in China, which exposes us to risks inherent in doing business there.
We use third-party suppliers and manufacturers based primarily in China. We use only a limited number of suppliers. This sourcing concentration increases our dependence of these suppliers and exposes us to the risks of doing business in China. We may have greater risks than our peers due to the concentration of our suppliers and manufacturers in China. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. Our results of operations will be materially and adversely affected if the labor costs of our third-party suppliers increase significantly. In addition, our suppliers may not be able to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China.
Sourcing products from China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S., Australian and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, custom duties, environmental regulations, land use rights, intellectual property, currency controls, network security, sanctions, embargoes, employee benefits and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in these jurisdictions. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.
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We purchase inventory in anticipation of sales, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.
Our business requires us to manage a large volume of inventory, including precise quantities across a large number of different products, effectively. We add new apparel, footwear and accessories styles to our sites every week, and we depend on our forecasts of demand to make purchasing decisions and manage our inventory of stock-keeping units, or SKUs. Demand for products, however, can change significantly between the time inventory is ordered and the date of sale. Demand may be affected by, among other things, the COVID-19 pandemic, new trends, seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, including political instability and social unrest. Our customers may not purchase products in the quantities that we expect.
It may be difficult to accurately forecast demand and determine appropriate levels of product. We generally do not have the right to return unsold products to our suppliers. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory levels or to pay higher prices to our suppliers, our profit margins may be negatively affected. Any failure to manage brand expansion or accurately forecast demand for brands could adversely affect our growth and our margins.
Privacy concerns and regulatory restrictions regarding the collection, use and processing of data could limit our ability to identify and respond to trends and to manage inventory. In addition, our ability to meet customer demand may be negatively impacted by a shortage in inventory due to reduced inventory purchases or disruptions in the supply chain due to a number of factors, including the COVID-19 pandemic. Historically, a substantial portion of the products we source from third parties have been manufactured in China. The COVID-19 pandemic has impacted, and will continue to impact, our supply chain as manufacturers operate at reduced capacity and demand from the online retail channel outpaces capacity. We also experienced increased shipping costs and transport delays as a result of the COVID-19 pandemic and weather-related conditions. While we seek to further diversify our supply chain and sourcing, we may not be able to diversify in a cost effective manner, or at all, which may materially and adversely affect our business, financial condition and operating results. Our distribution centers have been running at reduced capacity as a result of social distancing and other mandates in response to the COVID-19 pandemic. All of these challenges in our supply chain have affected, and may in the future affect, the quality of our products, the volume of refunds and returns, our brand reputation and our customers’ satisfaction and loyalty.
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If we experience problems with our distribution and warehouse management systems, our ability to meet customer expectations, manage inventory, complete sales transactions and achieve objectives for operating efficiencies could be adversely affected.
In the U.S., we rely on fulfillment centers in California, New Jersey and Missouri, which are operated by our third-party logistics provider, for all of our product distribution. Our fulfillment centers include computer-controlled and automated equipment and rely on a warehouse management system to manage supply chain fulfillment operations, which means their operations are complicated and may be subject to a number of risks related to cybersecurity, the proper operation of software and hardware, electronic or power interruptions or other system failures. In addition, because most of our U.S. fulfilled products are distributed from three primary fulfillment centers, our operations could also be interrupted by labor difficulties, or by floods (such as the recent flood in northeastern Australia), fires or other natural disasters near our fulfillment centers. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, such as the long-term loss of customers or an erosion of our brand image. Moreover, if we or our third-party logistics provider are unable to adequately staff our fulfillment centers to meet demand or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases, regulatory changes, hazard pay, international expansion or other factors, our results of operations could be harmed. In addition, operating fulfillment centers comes with potential risks, such as workplace safety issues and employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Our distribution capacity is also dependent on the timely performance of services by third parties, including the shipping of our products to and from our California, New Jersey and Missouri distribution facilities. We may need to operate additional fulfillment centers in the future to keep pace with the growth of our business, and we cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. If we encounter problems with our distribution and warehouse management systems, our ability to meet customer expectations, manage inventory and fulfillment capacity, complete sales transactions, fulfill orders in a timely manner and achieve objectives for operating efficiencies could be adversely affected, which could also harm our reputation and our relationship with our customers.
If we do not successfully optimize, operate and manage the expansion of the capacity of our fulfillment centers, our business, financial condition and results of operations could be harmed.
We anticipate the need to add fulfillment center capacity as our business continues to grow. If we continue to add fulfillment and warehouse capabilities, add products categories with different fulfillment requirements or change the mix in products that we sell, our fulfillment network will become increasingly complex and operating it will become more challenging. The expansion of our fulfillment center capacity may put pressure on our managerial, financial, operational and other resources. We cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. In addition, we may be required to expand our capacity sooner than we anticipate. If we are unable to secure new facilities for the expansion of our fulfillment operations, recruit qualified personnel to support any such facilities or effectively control expansion-related expenses, our order fulfillment and shipping times may be delayed and our business, financial condition and results of operations could be adversely affected.
Risks Relating to the Culture Kings Acquisition
We may not realize all of the anticipated benefits of the Culture Kings acquisition within the expected timeframe or at all.
The Culture Kings acquisition is the largest acquisition in our history, as measured by purchase price. The full benefits of the acquisition, including the anticipated sales or growth opportunities, may not be realized within the anticipated time frame, or at all. The risks that may impact our successful integration of Culture Kings into our business and platform include:
•loss of Culture Kings’ brand identity as a result of becoming part of a larger company;
•difficulties integrating operations and systems, for example, with respect to accounting and IT systems;
•difficulties integrating company policies and cultures;
•the failure to retain and assimilate Culture Kings’ employees; and
•our lack of experience operating brick-and-mortar stores.
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Uncertainty about realizing the full benefits of the Culture Kings acquisition may expose us to financial and operational risks. These uncertainties may impair our ability to attract, retain and motivate key personnel and could cause our customers, suppliers and other business partners to delay or defer certain business decisions or to seek to change existing business relationships with us. The integration process will result in significant costs and may divert management attention and resources. We may also fail to realize the anticipated financial benefits from the Culture Kings acquisition. The occurrence of any of these events could have a material adverse effect on our operating results.
The acquisition of Culture Kings exposes us to additional business risks that could adversely affect our business.
The success of the Culture Kings acquisition will depend on our ability to successfully integrate Culture Kings into our platform and operations, and to market Culture Kings in the U.S., which may require significant investment. In addition, the Culture Kings business introduces new risks to our platform. These risks include:
•the Culture Kings brand may not resonate with customers in the U.S.;
•Culture Kings may experience greater pricing competition in the U.S.;
•Culture Kings’ sale of third-party brands exposes our platform to licensing risks;
•Culture Kings’ joint venture agreements may expose us to risks related to jointly-owned intellectual property;
•we may encounter difficulties opening brick-and-mortar stores and expanding our supply chain and distribution network for Culture Kings;
•Culture Kings’ brick-and-mortar stores will expose us to premises liabilities, such as slip and falls, and may subject us to greater potential labor union activity; and
•Culture Kings may be vulnerable to greater reputational risk from association with celebrity endorsements.
Failure to effectively manage these new risks and achieve the anticipated benefits of the acquisition could adversely affect our operations and our future growth prospects.
Risks Relating to Laws and Regulation
Changes in laws or regulations relating to data privacy and security, or any actual or perceived failure by us to comply with such laws and regulations, or contractual or other obligations relating to data privacy and security, could lead to government enforcement actions (which could include civil or criminal penalties), private litigation or adverse publicity and could have a material adverse effect on our reputation, results of operations, financial condition and cash flows.
We are, and may increasingly become, subject to various laws, directives, industry standards and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our results of operations, financial condition and cash flows.
In the U.S., various federal and state regulators, including governmental agencies like the Consumer Financial Protection Bureau and the Federal Trade Commission (“FTC”), have adopted, or are considering adopting, laws and regulations concerning personal information and data security and have prioritized privacy and information security violations for enforcement actions. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the CCPA, which increases privacy rights for California residents and imposes obligations on companies that process their personal information, went into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain data sharing arrangements of personal information, and the ability to access and delete personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation.
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Furthermore, in November 2020, California voters passed the California Privacy Rights Act of 2020 (“CPRA”). Effective beginning January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding California residents’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and CPRA. Other jurisdictions in the U.S. have also adopted or are proposing privacy and data security laws that are similar or more restrictive than the CCPA, CPRA and GDPR (described below). including the Virginia Consumer Protection Act (“Virginia CDPA”) and the Colorado Privacy Act (Colorado Act”), each of which will become effective in 2023, further complicating the legal landscape. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been accessed or acquired as a result of a data breach, and, in some cases, provide notice to regulators. State laws are changing rapidly and there is discussion in Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted, which may add additional complexity, variation in requirements, restrictions and potential legal risks, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs or changes in business practices and policies.
We are also subject to international laws, regulations and standards in many jurisdictions, which apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. For example, the GDPR, which became effective in May 2018, greatly increased the European Commission’s jurisdictional reach of its laws and adds a broad array of requirements for handling personal data. EU member states are tasked under the GDPR to enact, and have enacted, certain implementing legislation that adds to and/or further interprets the GDPR requirements and potentially extends our obligations and potential liability for failing to meet such obligations. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, use, retain, protect, disclose, transfer and otherwise process personal data. In particular, the GDPR includes obligations and restrictions concerning data transparency and consent, the overall rights of individuals to whom the personal data relates, the transfer of personal data out of the European Economic Area (“EEA”) or the United Kingdom, security breach notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater. Recent legal developments in Europe have created further complexity and uncertainty regarding transfers of personal data from the EEA and the United Kingdom to the United States. Most recently, in July 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU-U.S. Privacy Shield Framework (“Privacy Shield”) under which personal data could be transferred from the EEA to the United States. While the CJEU upheld the adequacy of standard contractual clauses, a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism and potential alternative to the Privacy Shield, it made clear that reliance on them alone may not necessarily be sufficient in all circumstances.
Further, the United Kingdom’s decision to leave the EU has created uncertainty with regard to data protection regulation in the United Kingdom. As of January 1, 2021, we are also subject to the UK GDPR and UK Data Protection Act of 2018, which retains the GDPR in the United Kingdom’s national law. These recent developments will require us to review and amend the legal mechanisms by which we make and receive personal data transfers. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses and other mechanisms cannot be used, or start taking enforcement action, we could suffer additional costs, complaints or regulatory investigations or fines, or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we do business, the geographical location or segregation of our relevant operations, and could adversely affect our financial results.
Although we are working to bring our data privacy and cybersecurity practices into compliance with the GDPR, CCPA and other privacy laws which apply to our business, we may not currently comply fully with all aspects of such laws. To the extent we are currently not in compliance with such laws, we may face increased legal, financial and regulatory risks. All of these evolving compliance and operational requirements impose significant costs, such as costs related to organizational changes, implementing additional protection technologies, training associates and engaging consultants, which are likely to increase over time. The burdens imposed by privacy and data security laws and regulations may also limit our ability to analyze customer data, reduce the efficiency of our marketing, lead to negative publicity or make it more difficult to meet expectations of or commitments to clients, any of which could harm our business. In addition, these laws could impact our ability to offer our products in certain locations. These costs, burdens, and potential liabilities could be compounded if other jurisdictions in the U.S. or abroad begin to adopt similar or more restrictive privacy and data security laws. Such restrictions may require us to modify our data processing practices and policies, distract management or divert resources from other initiatives and projects, all of which could have a material adverse effect on our results of operations, financial condition and cash flows.
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Any failure or perceived failure by us to comply with any applicable federal, state or foreign laws and regulations relating to data privacy and security, or even the perception that the privacy of personal information is not satisfactorily protected, could result in damage to our reputation and our relationship with our customers, as well as proceedings or litigation by governmental agencies or customers, including class action privacy litigation in certain jurisdictions, which could subject us to significant fines, sanctions, awards, penalties or judgments, any of which could result in costly investigations and litigation, civil or criminal penalties, operational changes and negative publicity that could adversely affect our reputation, as well as our results of operations and financial condition.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, leases, impairment of goodwill and intangible assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change or increase volatility of our reported or expected financial performance or financial condition. 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 recent accounting pronouncements.
Our suppliers may not comply with our legal and social compliance program requirements, which could adversely affect our reputation.
We have a supplier compliance program that is monitored on a regular basis by our buying offices. Our suppliers’ facilities are either certified as in compliance with our program, or areas of improvement are identified and corrective follow-up action is taken. All suppliers are required to follow applicable national labor laws, as well as international compliance standards regarding workplace safety, such as standards that require clean and safe working environments, clearly marked exits and paid overtime. We also require those vendors to follow sourcing guidelines, which include environmental, labor, health, and safety standards. We believe in protecting the safety and working rights of the people who manufacture the products we sell, while recognizing and respecting cultural and legal differences found throughout the world. We require our third-party suppliers to register through an online website and agree that they and their vendors will abide by certain standards and conditions of employment. If our third-party suppliers fail to comply with our social compliance program, our reputation may be adversely affected. From time to time, contractors or their subcontractors may not be in compliance with these standards or applicable local laws. Significant or continuing noncompliance with such standards and laws by one or more suppliers could have a negative impact on our reputation, subject us to liability and have an adverse effect on our results of operations.
Our business is subject to federal, state, local and international laws and regulations regarding consumer protection, promotions, safety and other matters. The costs of compliance with, or the violation of, such laws and regulations by us or by independent suppliers who manufacture products for us could have an adverse effect on our operations and cash flows, as well as on our reputation.
Our business is subject to federal, state, local and international laws and regulations on a wide range of consumer protection, promotion and pricing of merchandise, safety and other matters. The merchandise we sell to our customers is subject to regulation by the Federal Consumer Product Safety Commission, the FTC and similar state and international regulatory authorities. For example, the FTC labeling regulations require us to accurately disclose, on our website and on every item of apparel, the country of origin for each item and the materials used in its manufacture. We are subject to risks related to the interpretation of state and local laws and regulations governing the collection and remittance of sales and use taxes, and laws and regulations governing pricing, promotions and sales. We could be adversely affected by costs of compliance with or violations of those laws and regulations. In addition, we require third-party suppliers to operate in compliance with applicable laws, rules and regulations regarding working conditions, safety, employment practices and environmental compliance, which could increase our costs due to the costs of compliance by those contractors. Failure by us or our third-party suppliers to comply with such laws and regulations, as well as with ethical, social, product, labor and environmental standards, or related political considerations, could result in interruption of finished goods shipments to us, cancellation of orders by customers and termination of relationships. If one of our independent contractors violates labor or other laws, implements labor or other business practices or takes other actions that are generally regarded as unethical, it could jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts that may reduce demand for our merchandise. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.
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Unfavorable changes or failure by us to comply with evolving internet and eCommerce regulations could substantially harm our business and operating results.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the internet and eCommerce. These regulations and laws may involve taxes, privacy and data security, consumer protection, the ability to collect and/or share necessary information that allows us to conduct business on the internet, marketing communications and advertising, content protection, electronic contracts and gift cards. Furthermore, the regulatory landscape impacting internet and eCommerce businesses is constantly evolving. For example, California’s Automatic Renewal Law requires companies to adhere to enhanced disclosure requirements when entering into automatically renewing contracts with consumers. As a result, a wave of consumer class action lawsuits was brought against companies that offer online products and services on a subscription or recurring basis. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, lost business, and proceedings or actions against us by governmental entities or others, which could impact our operating results.