Culture Kings forced to discount aggressively as goodwill written down to zero by US owners
Once the hottest retail brand in town, Culture Kings’ goodwill has gone from $400m to zero in two years as it is forced to heavily discount stock.
Culture Kings, the on-trend sneakers chain that was once the hottest retail brand in the country, has been forced to discount aggressively to clear stock in the face of collapsing consumer spending — with the retailer’s initial goodwill of $US264m ($400m) now entirely written down to zero by its US owners.
Founded on the Gold Coast in 2008 by entrepreneurial couple Simon and Tahnee Beard and later sold to US company a.k.a Brands for $600m in cash and shares, Culture Kings had enjoyed boom conditions to even open its maiden store in the US – on the glittering Las Vegas casino strip – but it is now struggling in its home market of Australia.
Latest financial documents lodged with the US Securities and Exchange Commission show the impact of a slowing Australian consumer burdened by rising interest rates, higher rents and other cost of living pressures cutting back on discretionary goods such as pricey sneakers and streetwear as sold by Culture Kings though its eight stores in Australia and one in New Zealand.
Over the nine months to the end of September sales at Culture Kings have fallen almost 30 per cent, while for the third quarter average order value in Australia and New Zealand slid by 8 per cent.
This is a complete reversal of the explosive double-digit growth rates Culture Kings had enjoyed for years as it took off from an idea fostered by the Beard’s after they began their fashion and apparel dreams two decades ago selling slippers to schoolies on the Gold Coast.
Meanwhile, a goodwill writedown of $US60m in the latest accounts now takes the financial value of the company’s brand and relationships to zero — down from $US264m at the time of its takeover two years ago.
Earlier this year Tahnee and Simon Beard stepped down from running their sneakers chain after the successful opening of the US store.
“As the founder it’s my baby, and Tahnee has delivered the Las Vegas store and is beating expectations, but Tahnee and I are entrepreneurial to our core and the public company or holding company role it’s not for me, not my best fit,” Mr Beard told The Australian in March.
When the Gold Coast couple sold the business to a.k.a Brands in March 2021 they took half the $600m sale price in a.k.a Brands shares, which later rallied to almost $US15 a share to take their personal wealth to about $700m and rank the 30-something year olds as one of the wealthiest young individuals in Australia.
However, a sharemarket rout has since seen a.k.a Brands shares sink by more than 90 per cent, puncturing the couple’s wealth by around $US340m on paper.
Their wealth, based on the 23.3m a.k.a Brands shares taken as part of the sale deal, has improved recently with a.k.a Brands shares almost doubling since May.
Meanwhile, Culture Kings is the latest fashion and apparel brand to testify to a downbeat consumer, with Country Road Group and the nation’s largest footwear retailer Accent Group, whose retail brands and shoe distribution deals include Skechers, Platypus, Hype DC, The Athlete’s Foot and Vans, also recently revealing sinking sales.
Culture Kings stores, known for their hyperactive in-store entertainment with basketball courts, barbers, DJs and other events, has now succumbed to this retail and consumer malaise and is resorting to deep discounting to sell stock – but this has come at a cost to its US owners.
“We are facing continued macro pressure across our brands in Australia and New Zealand,” a.k.a Brands interim chief executive Ciaran Long told US analysts and investors.
“Despite the growth in the US, a quarter of profitability was impacted by continued consumer macro headwinds in Australia … with continued macro pressure in Australia, we are taking aggressive actions to right size the Culture Kings inventory in the region,”
“We’re taking aggressive action to right-size our inventory position in Australia.
“We invested about 105 basis points of gross margin with the actions we took to move through inventory at Culture Kings in Australia in the third quarter.”
The a.k.a Brands financial accounts report that an increase in cost of sales as a percentage of net sales was primarily due to an approximately 150 basis point impact from targeted discounting in Culture Kings Australia and a higher merchandise return rate, partially offset by lower airfreight expense.
“I’m confident that the transition to a test and repeat merchandising model and the reduction of inventory sets Culture Kings up for a strong 2024 in Australia and we’re very confident in the brand’s long-term success.”
In the US the picture is very different with Culture Kings’ maiden store at the famed Caesars Palace casino in Las Vegas hitting the jackpot with sales for its sneakers, baseball caps and streetwear to deliver above initial expectations.
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