Digital Brands Group, Inc. (NASDAQ:DBGI) Q3 2023 Earnings Call Transcript

Digital Brands Group, Inc. (NASDAQ:DBGI) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Thank you for standing by, and welcome to the Digital Brands Group, Inc. Q3 2023 Earnings Call. I would now like to welcome John McNamara, Investor Relations to begin the call. John, over to you.

John McNamara: Good afternoon, everyone, and thank you again for joining us on the Digital Brands 2023 Third Quarter Financial Results Conference Call. With us on the line from Digital Brands is Hil Davis, Chief Executive Officer. Hill will begin the call with a brief overview of the quarter, and then we’ll open up the lines for questions. As usual, we would remind you that this earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding among other things such as the company’s business strategy and growth strategy. Expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on the company’s expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond the company’s control.

Future developments and actual results could differ materially from those set forth by the underlying forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. With that, I’d like to turn the call over to Hill Davis. Go ahead, Hill.

Hil Davis: Thanks, John, and good afternoon, everyone. We are now halfway through our fourth quarter, and we’ve also closed our first quarter 2024 wholesale bookings. Given the current trends of the fourth quarter and our first quarter wholesale bookings, we are pleased to announce that we have turned Sundry around. Sundry set their bottom in August, and it has been on a steady increase every month since then. For example, we have tripled Sundry’s first quarter 2024 wholesale bookings versus the Brand’s third quarter 2023 wholesale revenue, which again saw the bottom for both July and August. And ever since then, we’ve seen a significant increase. Additionally, Sundry’s fall sweater sold out so quickly at wholesale that Anthropologie has asked for an exclusive sweater program for next fall and holiday, which will increase our wholesale revenues significantly versus not only our first quarter bookings, but our third and fourth quarter results of this year.

In fact, other wholesale accounts have stated they under ordered for fall and holiday for Sundry given the products are selling out on their floor within weeks. Today, we just learned that another major retail chain and our largest wholesale account sold through 57% of Sundry’s holiday sweaters in one week. That is correct, one week. They now also want to go deeper in their buy next year. The turnaround in Sundry, along with the increase in our revenue from our other brands, coupled with the cost synergies, has resulted in meaningful operating leverage. In fact, based on the increasing revenue trends and the decline in our operating expenses, we expect to be EBITDA-neutral in the first quarter. This assumes the current e-commerce trends as is, and these trends have been softer than we expected due to the soft macro environment that other retailers and DTC companies have reported.

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Q&A Session

In fact, this is one of the most promotional periods we have ever experienced with promotions starting much earlier and at much higher discounts than we have seen in the past. And based on the other retailers that have reported earnings as well as my discussion with private companies, everyone is seeing and experiencing this, even including Home Depot today, Target, Levi’s, Nike, et cetera. Despite these softer e-commerce trends, we still generated internal free cash flow in October — which we used — sorry, my EarPods died. Despite these softer e-commerce trends, we still generated internal free cash flow in October, which we used to pay down old accounts payable and debt. We expect to generate internal free cash flow going forward, and we will continue to clean up the balance sheet as this is what private investors have told us that they value the most.

In fact, the monthly internal free cash flow should increase in April and again in October. The increase in October alone is over 60,000 a month, just due to the fact our office and distribution center rent will no longer include the catch-up payments due to the landlord from the COVID years where we paid no rent. Let me repeat that, just starting in October alone, we will pick up an additional $60,000 of free cash flow just from paying a normalized rent versus a rent plus old rent due from COVID. We are also finalizing a lease for an outlet store that would take over an existing outlet location that would open approximately March 1. The Brand in this store currently does $1.8 million a year, which is $150,000 a month. It costs approximately $45,000 a month to operate.

And since we have a lot of old Sundry products from the acquisition, we will have no cash cost for our cost of goods sold. This should add a minimum of $50,000 to monthly cash flow, assuming the revenues dropped to $100,000 a month, which we do not expect, but it is a conservative scenario. If we maintain the same monthly revenue, then the cash flow should approximate an additional $100,000 a month on top of our current amount. Based on the $4.5 million in wholesale bookings, plus our e-commerce revenue plus store revenue plus wholesale reorders plus licensing income from our licensing deal, we expect to achieve EBITDA neutral to positive in the first quarter. And based on the Anthropologie exclusive sweater program alone, not to mention the feedback from other wholesalers, we should be meaningfully over that $6 million revenue threshold for the third and fourth quarters.

So again, $6 million in quarterly revenue is EBITDA neutral. And again, based on our current wholesale bookings for Q1, which are booked and our purchase orders that are in our system and binding plus our e-commerce trends plus the store revenue from the outlet plus the wholesale reorders we get, plus our licensing income for the first and second quarter, we expect to be at a minimum EBITDA neutral and in third and fourth quarters nicely EBITDA positive. In short, we have, one, accelerating revenues, which should result in revenue growth of 50% plus in the first and second quarters and close to 100% in the third and fourth quarters. Secondly, internal free cash flow that is also increasing when we come to March and September and three, neutral EBITDA in the first half and EBITDA positive in the second half, which is also why our internal free cash flow increases.

We believe these fundamentals and metrics do matter, and we will find the investors private or public who value these trends as we are clearly not getting any credit for them today in the public markets. So with that, let’s discuss third quarter results. Net revenues increased 22.5% to $3.3 million compared to $2.7 million a year ago. Please note, these results exclude the revenue from our disposition of Harper & Jones for both the third quarter of 2022 and 2023. Most importantly, this represents the lowest point of Sundry’s wholesale revenue based on our current fourth quarter trends and first quarter wholesale bookings. As Q1 2024 wholesale bookings are triple to the third quarter wholesale revenue, and that is also a reflection of the changes that we made when we acquired Sundry when we changed the design team and also changed our pricing and our fabric quality.

We were not able to impact change until September, and we are actually seeing those results now play out very nicely. Gross margin increased 77% to $1.7 million compared to $1 million a year ago. Our gross profit margins increased significantly to 52.3% from 36% a year ago and also 52% from the second quarter. So we are holding and growing gross margin. G&A expenses, including noncash items, increased 25.3% to $3.7 million compared to $3 million a year ago. G&A expenses, including noncash items — excluding noncash item expenses, decreased 30.8% to $1.6 million compared to $2.3 million a year ago. G&A expenses included $2.1 million in noncash expenses associated with depreciation and amortization, amortization of loan discount and stock option expense.