ALLIANCE ENTERTAINMENT HOLDING CORP

Alliance Entertainment Holding Corporation operates as a global distributor and retailer of physical entertainment and collectible products, including vinyl records, CDs, DVDs, Blu-rays, video games, electronics, and licensed fan merchandise. The company serves over 35,000 retail locations and more than 200 online storefronts across over 70 countries through a multi-channel distribution model. Its business model is centered on providing efficient processing and essential seller tools to reduce costs for retailers and streamline the purchasing experience, acting as a single source for entertainment product needs. Revenue is generated from the sale and distribution of these products, with a mix of B2B and direct-to-consumer (DTC) sales. DirectToU LLC, the company's consumer-direct subsidiary, contributed approximately 37% ⁴ of gross revenue for the year ended June 30, 2025, an increase from 36% ⁵ in the prior year.

The company's product and service lines are categorized into five primary areas. For the fiscal year ended June 30, 2025, Gaming Products represented approximately 24% ⁶ of consolidated revenues, a decrease from 31% ⁷ in the prior year. Vinyl Records constituted approximately 32% ⁸ of all Company revenues, up from 30% ⁹ in the previous year. Digital Video Discs (DVD)/Blu-Ray/UltraHD sales accounted for approximately 26% ¹⁰ of consolidated revenue, a significant increase from 19% ¹¹ in the year ended June 30, 2024. Compact Discs (CDs) represented approximately 12% ¹² of consolidated revenue, consistent with the prior year. Collectibles and Electronics sales were approximately 4% ¹³ of consolidated revenue, also consistent with the prior year.

For the fiscal year ended June 30, 2025, Alliance Entertainment reported total net revenues of $1,063,457 thousand ¹⁴, a decrease of 3% ¹⁵ from $1,100,483 thousand ¹⁶ in the prior year. Cost of Revenues (excluding depreciation and amortization) decreased by 4% ¹⁷ to $930,605 thousand ¹⁸ from $971,594 thousand ¹⁹. Gross margin increased from 11.7% ²⁰ to 12.5% ²¹. Operating income for the year ended June 30, 2025, was $30,136 thousand ²², a substantial increase from $14,141 thousand ²³ in the prior year. Net income was $15,078 thousand ²⁴, up from $4,581 thousand ²⁵ in the previous year. Diluted EPS was $0.30 ²⁶ for the fiscal year ended June 30, 2025, compared to $0.09 ²⁷ in the prior year. Cash and equivalents stood at $1,236 thousand ²⁸ as of June 30, 2025, with a Revolving Credit Facility balance of $57,257 thousand ²⁹ and a Shareholder Loan (subordinated) of $10,000 thousand ³⁰.

Year-over-year, vinyl record sales increased by $11 million ³¹ (3%) ³² to $340 million ³³, driven by a 3.8% ³⁴ increase in sales volume. Physical movie sales (DVDs, Blu-Ray, Ultra HD) saw strong growth, increasing by $75 million ³⁵ (37%) ³⁶ to $279 million ³⁷, with unit volume rising by 14.8% ³⁸ and average selling price by 18.8% ³⁹. Conversely, gaming sales decreased by $83 million ⁴⁰ (25%) ⁴¹ to $255 million ⁴², primarily due to a 61.5% ⁴³ decline in unit volume, partially offset by a 93.4% ⁴⁴ increase in average selling price. Music Compact Discs (CDs) sales slightly decreased by $5 million ⁴⁵ (4%) ⁴⁶ to $125 million ⁴⁷. Total Operating Expenses declined by 10.3% ⁴⁸ and decreased as a percentage of revenue from 10.4% ⁴⁹ to 9.7% ⁵⁰. Distribution and Fulfillment expenses decreased from 4.4% ⁵¹ to 3.8% ⁵² of net revenue.

During the fiscal year, Alliance launched Alliance Home Entertainment, becoming the exclusive distributor of Paramount Pictures' physical media content as of January 1, 2025. The company also launched Alliance Authentic, a new division focused on licensed collectibles and branded merchandise, including partnerships with Handmade by Robots, Master Replicas, and Wētā Workshop. On December 17, 2024, Alliance acquired Handmade by Robots from Bensussen Deutsch & Associates, LLC for $7.6 million ⁵³. The company also implemented the OPEX Sure Sort X® system in April 2024 to automate the sortation of non-standard size products at its Shepherdsville, Kentucky facility, following the implementation of an AutoStore Automated Storage & Retrieval System in December 2022. In May 2024, the Shakopee, MN warehouse was closed, and operations were consolidated in Shepherdsville, KY.

The company plans to continue its growth strategy through both organic expansion and acquisitions, leveraging its public listing to access additional capital. A key component of this strategy is to execute its acquisition strategy more effectively with additional capital, building on a proven track record of successfully acquiring and integrating competitors and complementary businesses. Alliance expects to continue pursuing strategic opportunities that strengthen its platforms, expand content breadth and depth, and enhance distribution infrastructure, actively monitoring and evaluating opportunities in its acquisition pipeline in both the near and mid-term.

Alliance aims to increase market share by expanding its existing product and service offerings and executing its acquisition strategy. The company has historically built scale and added capabilities through acquisitions and has demonstrated an ability to integrate acquired businesses to improve them fundamentally. Furthermore, Alliance intends to enhance its Direct to Consumer (DTC) relationships and capabilities, recognizing the increasing demand for DTC services as consumer preferences shift and stress retailers' e-commerce and DTC capabilities. Improving these capabilities is expected to generate a more attractive overall service offering and grow existing revenue lines.

The company also plans to expand into new consumer product segments by leveraging existing relationships, thereby growing its product offering and attracting new customers while providing more to its existing customer base. This expansion is expected to capitalize on the growing demand for branded, limited-edition pop culture products that can be marketed through both B2B and DTC channels, complementing core media offerings.

Alliance will continue to invest in technological advancement, specifically by further automating facilities and upgrading proprietary software. Recent investments include the OPEX Sure Sort X® system implemented in April 2024 and the AutoStore Automated Storage & Retrieval System in December 2022, which have contributed to operational efficiencies and cost savings. These ongoing investments are expected to enhance transaction efficiency and engagement, supporting revenue growth and profitability.

The company plans to capitalize on strategic studio partnerships, building on its exclusive distribution agreement with Paramount Home Entertainment through Alliance Home Entertainment. The goal is to develop additional studio partnerships to expand its footprint in the physical media market and strengthen its position as a preferred content distribution partner. This strategy is expected to introduce a slate of high-profile titles that enhance both pricing power and retail visibility.

Regarding capital allocation, the company's primary sources of liquidity are existing cash provided by operating activities and borrowings under its credit facility. As of June 30, 2025, the company had $1,236 thousand ²⁸ in cash and a $57,257 thousand ²⁹ revolver balance on its $120 million ⁵⁴ credit facility. The company does not currently expect warrants to be exercised unless the market price of its Class A common stock exceeds the exercise price of $11.50 ⁵⁵, given the market price was $3.77 ⁵⁶ as of June 30, 2025. The company may seek to raise additional capital through equity issuance in the future, depending on market conditions, strategic opportunities, and liquidity needs.

The company faces structural headwinds and execution risks, including macroeconomic conditions such as persistent inflation, high interest rates, and cautious consumer spending. Renewed tariff discussions on imported physical media and electronics present potential cost increases that could pressure future gross margins. The company continues to monitor these factors and their potential impact on its business, financial condition, and results of operations.

The company faces several material risks, including the failure to adapt to rapid technological developments and changes in entertainment delivery formats, which could harm its business. Disruptions in the supply chain, including geopolitical events, natural disasters, and labor shortages, have increased product expenditures and could adversely impact results of operations. Inflation may cause product costs and operating expenses to grow faster than net sales, leading to lower gross margins and net earnings. Weakness in the economy, market trends, and conditions affecting customer profitability could negatively impact sales growth. The company's expansion into new products, services, technologies, and geographic regions places a strain on management, operational, and financial resources, and there is no assurance that anticipated benefits from acquisitions or investments will be realized. Significant inventory risk exists due to seasonality, new product launches, rapid changes in product cycles, and consumer demand shifts. The concentration of its retail customer base, with the top three customers generating approximately 40% ⁵⁷ of net sales and the largest customer accounting for approximately 15% ⁵⁸ of total net sales for the year ended June 30, 2025, poses a risk if these customers experience difficulties or change purchasing patterns. Reliance on third-party suppliers, labels, studios, and publishers, with whom the company generally does not maintain long-term contracts, exposes it to price fluctuations, demand disruptions, and quality control problems. The company's existing indebtedness, including a $57 million ²⁹ outstanding balance on a $120 million ⁵⁴ senior secured revolving credit facility, could adversely affect its ability to operate, limit cash availability, and subject it to restrictive covenants. Litigation and regulatory risks, such as the Office Create Corporation lawsuit seeking damages in excess of $35 million ⁵⁹ and the VPPA class action lawsuits, could entail significant expense and harm the business.

Management's message to shareholders emphasizes the company's unique position in the entertainment ecosystem, supported by a diverse portfolio of direct-to-consumer brands and a multi-channel distribution model serving over 35,000 retail locations and more than 200 online storefronts across over 70 countries. They highlight the company's operational efficiencies, driven by advanced warehouse automation and scalable logistics infrastructure, which enable a broad product selection and fast fulfillment across over 340,000 SKUs. Management is focused on three strategic priorities: capitalizing on its services, selection, and scalable distribution network technology to propel future growth both organically and through acquisitions; increasing market share by expanding existing product and service offerings and executing its acquisition strategy; and enhancing Direct to Consumer (DTC) relationships and capabilities to address shifting consumer preferences. The company reported a net income of $15,078 thousand ²⁴ for the year ended June 30, 2025, and an Adjusted EBITDA of $36,543 thousand ⁶⁰, an improvement of $12,276 thousand ⁶¹ year-over-year.