Digital Brands Group, Inc. (NASDAQ:DBGI) Q1 2023 Earnings Call Transcript May 22, 2023

Operator: Hello, and welcome to the Digital Brands Group, Inc. Q1 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to John McNamara, Investor Relations. Please go ahead, John.

John McNamara : Thank you. Good morning, everyone, and welcome to the Digital Brands Group 2023 first quarter conference call and webcast. With us on the call this morning is Hil Davis, Chief Executive Officer of Digital Brands. Before we begin, we would remind everyone that certain matters discussed during today’s call or answers that may be provided to questions, may constitute forward-looking statements as defined under Federal securities laws. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the Company’s quarterly report on Form 10-Q filed with the SEC. Copies of these documents are available on the SEC’s website as well as on the company’s website.

Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law. With that, I’d like to now turn the call over to Hil Davis, CEO. Go ahead Hil.

Hil Davis: Yes, thank you, John. As we stated during our fourth quarter and fiscal year 2022 conference call in mid-April, we experienced significant operating leverage with the acquisition of Sundry. To that point, our operating loss would’ve been only $250,000, excluding the non-cash expenses, and approximate $250,000 in Sundry expenses that we are no longer incurring since we completed the integration in late March. As you can see from our release, we experienced operating leverage on every line item, and we still expect to achieve some additional expense reductions going forward. Also, please keep in mind, our e-commerce revenue for both January and February was half our March e-commerce revenue as we transitioned to a performance marketing agency.

Our e-commerce revenue has extremely high gross margin and requires very little additional operating expense to execute, so the flow through would’ve been extremely high. This is why we’re excited for the fall as we have: one e-commerce in full force; two, higher price point items like leathers, sweaters, and outerwear; three, Bailey 44 generating revenue from the wholesale channel again; and four, distilled with the full product assortment versus limited and busted sizing in inventory. This is why we expect to achieve EBITDA positive this fall, which, by the way, is only three months away. In addition to that, we are also excited about our two new revenue channels that we will launch this fall. The first is our proprietary affiliate program, which we have been building a founding group of influencers and affiliates for the soft launch in August.

We believe this is an extremely scalable channel based on my past experiences and the positive reception we are experiencing. The second is our multi-brand retail store strategy. Based on the success with existing DTC brands with their own retail stores, coupled with the success of our multi-brand website, we believe that we can operate 50-plus stores in Tier 1 locations. We have seen the revenues of our peers in these locations, and they are generating between $2 million to $4 million plus per store and are profitable at the store level. Again, this is 50 stores times $2 million to $4 million in revenue per store. We will use our free cash flow this fall to ramp our store growth and expect to add 5 plus stores a year for the next few years and accelerate it after that.

We believe both channels will increase our e-commerce and wholesale revenue as these channels will increase brand awareness and customer acquisition. And we believe our membership program, which will launch in the second half of June, just a few weeks away, will drive customer retention and repeat purchases. To that point, we are creating e-commerce-only monthly drops like the sneaker business that will only be available to members and will be offered at special member pricing, which will not include a wholesale markup. The customer value proposition is very strong. As you can see, the first quarter was proof of the operating leverage we can achieve and a clear and short path to profitability. So with that, let’s discuss the first quarter results.

Results for the first quarter are as follows: Net revenues increased 48.4% in the first quarter of 2023 to $5.1 million compared to $3.4 million a year ago. Please note, we did not receive the full benefit of the e-commerce revenue in January and February as we had to reduce Digital’s advertising spend associated with the transaction — transition to performance marketing agency. Gross margin profit for Q1 2023 increased 113.9% to $2.4 million compared to $1.1 million a year ago. Our gross profit margin increased significantly to 47.9% from 33.2% a year ago. G&A expenses, including noncash items, increased 8.4% to $4.6 million compared to $4.3 million a year ago. G&A as a percentage of revenue declined to 91% from 124.6% a year ago. Most notably, G&A expenses included noncash expenses of $3.1 million compared to $1.8 million a year ago.

These are detailed in our free cash flow statement — or on our cash flow statement on our press release and in our 10-Q. Excluding these noncash items, G&A would have been $1.6 million compared to $2.5 million a year ago which as a percent of revenues declined to 30.4% from 72.6% a year ago. Sales and marketing expenses increased 7.2% to $1.1 million compared to $1 million a year ago. That’s a 7.2% increase in sales and marketing versus a 48.4% increase in e-commerce or total revenue. Sales and marketing expense ratio was 21.9% compared to 30.3% a year ago. Our loss from operations declined to $3.6 million compared to a loss of $5.6 million a year ago. Excluding the noncash items and G&A expenses, loss from operations declined to $500,000 compared to a loss of $3.8 million a year ago.

Let me repeat that. Excluding the noncash items and G&A expenses, loss from operations declined to $500,000 compared to a loss of $3.8 million a year ago. And please note that these losses included approximately $250,000 in expenses associated with the integration and timing of the Sundry transition, which will no longer be incurred as they have been transitioned into our Vernon facility and the Sundry headcount is lower today than it was at the acquisition. Net loss attributable to common stockholders was $6.2 million or a loss of $1.08 per diluted share compared to $7.8 million or $59.18 per diluted share a year ago. Excluding the noncash items from G&A and other income, net loss would have been $2.4 million or a loss of 42% per diluted share compared to a net loss of $6.1 million or a loss of 40.577 cents per diluted share a year ago.

Our first quarter 2023 financial details are included in the company’s Form 10-Q for the three months ended March 31, 2023. In closing, as we have stated since we went public, adding Sundry to the portfolio was our tipping point in terms of: one, our ability to scale revenue faster through new channels in e-commerce; and two, generate positive EBITDA and cash flow, which will in turn allow us to invest in our growth channels at an accelerated rate. So this is a major tipping point and the first quarter results were the first and smallest benefit and proof of concept from our Sundry acquisition. We expect the tipping point and the benefit and the proof of concept to only accelerate as we move into the fall. We are excited for the forecasted monthly free cash flow that we should generate this fall associated with: one, positive EBITDA; and two, the end of our MCA payments in early October.

We should generate over $500,000 in free cash flow monthly starting after our last MCA payment in early October. We will use this free cash flow to accelerate the growth channels that are generating strong returns as well as potentially buying back shares if that is the highest and best use of capital. We should have the cash flow to pursue both our accelerated growth strategy and a share buyback program, if that is the best use of capital and creates the highest returns. And at these levels, obviously, this dual approach would be the best case for shareholders. Thanks, everyone, for their time, and let’s open it up for questions, please.

Operator:

Hil Davis: Yes. Well, thanks, everyone, for attending the call. And I think the key thing here is we talked about the Sundry acquisition being the tipping point. I think the first quarter results prove that. I think what’s most exciting as we look forward, not only do we have our current growth drivers, we’ve got the affiliate program, we’ve got store growth, we’ve got significant cash flow, and we’ll use that to not only accelerate that; but like as we said, at these levels to buy back shares and drive shareholder return. I appreciate everyone’s time, and have a good day.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.