Digital Brands Group Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 3 speakers on the call.

Operator

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.

Speaker 1

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 Hill 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 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 Future developments and actual results could differ materially from those set forth by the underlying forward looking statements.

Speaker 1

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.

Speaker 2

Thanks, John, and good afternoon, everyone. We are now halfway through our Q4 and we've also closed our Q1 2024 whole Given the current trends of the Q4 and our Q1 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 Q1 2024 wholesale bookings versus the brand's 3rd quarter 2023 wholesale revenue, which again saw the bottom for both July August. And ever since then, we've seen a significant 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, about our 3rd and 4th quarter results of this year.

Speaker 2

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 1 week. That is correct, 1 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.

Speaker 2

In fact, based on the increasing revenue trends and the decline in our operating expenses we expect to be EBITDA neutral in the Q1. This assumes the current e commerce and these trends have been softer than we expected due to the soft macro environment that other retailers and DTC companies In fact, this is one of the most promotional periods we have ever experienced with promotions starting much earlier and at much higher discounts and based on the other retailers that have reported earnings as well as my discussion with private companies, Everyone has seen and experiencing this, even including Home Depot Today, Target, Levi's, Nike, etcetera. Despite the softer e commerce trends, we still generated internal free cash flow in October. Which we used Sorry, my ear pod died. Despite these often softer e commerce trends, we still generated internal free cash flow in October, which we used to pay down old accounts payable and debt.

Speaker 2

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 an October alone, We will pick up an additional $60,000 in free cash flow just from paying a normalized rent versus a rent plus old rent due from COVID.

Speaker 2

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 $1,800,000 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 product from the acquisition, We will have no cash costs for our cost of goods sold. This should add a minimum of $50,000 to monthly cash flow, assuming the revenues drop to $100,000 a month, which we do not expect, but it is a conservative scenario.

Speaker 2

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 point $5,000,000 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 Q1. And based on the Anthropologie exclusive sweater program alone, not to and the feedback from other wholesalers, we should be meaningfully over that $6,000,000 revenue threshold for the 3rd 4th quarters. So again, dollars 6,000,000 in quarterly revenue is EBITDA neutral. And again, based on our current Wholesale bookings for Q1, which are booked and are 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 1st and second quarter, We expect to be at a minimum EBITDA neutral and in 3rd and 4th quarters, nicely EBITDA positive.

Speaker 2

In short, we have 1, accelerating revenues, which should result in revenue growth of 50% plus in the 1st and second quarters and close to 100% in the 3rd 4th quarters. Secondly, internal free cash flow that is also increasing when we come to March September. And 3, 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 3rd quarter results.

Speaker 2

Net revenues increased 22.5 percent to $3,300,000 compared to $2,700,000 a year ago. Please note these results exclude the revenue from our disposition of Harper and Jones for both the Q3 of 20222023. Most importantly, this represents the lowest point of sundry's wholesale revenue based on our current Q4 trends and Q1 wholesale bookings. As Q1 2024 wholesale bookings are triple the 3rd quarter wholesale revenue. And that is also a reflection of changes that we made when we acquired Sundry, when we changed the design team and also changed our pricing and our fabric quality.

Speaker 2

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 percent to $1,700,000 compared to $1,000,000 a year ago, our gross profit margins significantly to 52.3 percent from 36% a year ago and also 52% from the Q2. So we are holding and growing gross margin. G and A expenses, including non cash items, increased 25.3 percent to $3,700,000 compared to $3,000,000 a year ago. G and A expenses including Non cash item excluding non cash item expenses decreased 30.8 percent to $1,600,000 compared to $2,300,000 a year ago.

Speaker 2

G and A expenses included $2,100,000 in non cash expenses associated with depreciation and amortization, amortization of loan discount and stock option expense. Sales and marketing expenses increased 12.6% to $1,200,000 compared to $1,000,000 a year ago. Sales and marketing expense ratio was 35.3% compared to 38.5% a year ago. Net operating loss excluding the non cash charge was $1,200,000 compared to a loss of $2,500,000 a year ago. We cut our net operating loss in half on very low revenue.

Speaker 2

In fact, revenue that's significantly below just our Q1 wholesale bookings alone. Net loss per diluted share attributable to common stockholders was $5,400,000 or $14.55 per diluted share compared to a loss of 4 $900,000 or a loss of $223.83 per diluted share a year ago. Net loss per diluted share excluding non cash expenses was $2,600,000 or $8.92 per share. In closing, As we stated, the Board is reviewing strategic alternatives given the continued dislocation between Digital Brands Group public market value and the intrinsic value of the company's underlying assets and operating performance. We believe the Q1 2024 wholesale bookings and the monthly internal free cash flow illustrate how significant this dislocation has become.

Speaker 2

We are on an $18,000,000 wholesale revenue run rate for 2024 and that does not include any revenue impact from our e commerce revenue, our store revenue or our licensing income. Finally, we should generate more than $6,000,000 internal free cash flow for 2024. We have several options that we can pursue, all of which should increase shareholder value meaningfully. We know that there is significant demand for our NASDAQ as well. We're extremely serious about these options as it is crystal clear that we are not getting credit for our acquisitions or our revenue growth and the fact that we are generating internal free cash flow and we will be EBITDA positive in 2024 on top of the significant internal free cash flow.

Speaker 2

And our internal free cash flow, as I mentioned, should increase as we move through 2024 based on the outlet store and the rent payments as noted earlier. All these do not seem to matter to the public markets at this time, which is why we are moving forward with the strategic alternative path. Thanks for your time and we look forward to the continued momentum. This concludes our 2023 3rd quarter's earnings call. Let's open it up to Q and A, please.

Operator

Again, the floor is now open for your questions.

Speaker 2

I have a couple of questions that have come across through email or social media as well.

Operator

There are no questions at this time, sir.

Speaker 2

Yes. So let me a couple of questions we've gotten. One is, Do we expect our gross margins to continue at this level? And the answer is yes, we do. And there's a few reasons for that.

Speaker 2

And the biggest reason is There's a lot of fixed cost in our gross margin. So for instance, when we make the samples for the wholesale, our distribution center rent, our labor back there, sewers, pattern makers, so there's a high fixed dollar amount. So as our revenues increase, we get leverage on that fixed cost. Additionally, we also expect to cut another $500,000 in cost as we move through. Now this is in the OpEx line items, but we'll cut another $500,000 in cost in kind of Q1 and going forward as well, and that's on an annualized basis.

Speaker 2

But we do expect gross margins to hold at this level or potentially increase as well, especially as we get into Q4 because we're able to leverage those fixed costs that are associated in our gross margin. The other question is, Are we frustrated with where we are and are we serious about going this pursuing these strategic alternatives. And the answer is yes and yes. I mean it's clear like I said and the Board feels the same way that we're just not getting The appreciation for kind of the turn we've built in the business, the acquisitions we've made, the leverage we've created, the revenue growth and the internal free cash flow. And at this point, We are actively pursuing it.

Speaker 2

As everyone knows on the call, we don't issue a lot of PR. We did issue PR on this and it was very intentional. And we will continue to pursue this very aggressively. And we feel like at this point in time that we're just not getting credit for what we've built and the results we're achieving. And I think Q1 is a perfect example of that.

Speaker 2

And I think October free cash flow as well as the Q1 wholesale bookings And just the feedback we're getting from the wholesale accounts on how well our products are selling through now has really shown us that We need to find the best path for shareholders and it does not seem like the public markets at this point might be that path. Those were the major questions that I got either email or social media. I guess with that, we can conclude the call.

Operator

I would like to thank your speakers.

Speaker 2

Sorry, one more question I just got. Someone asked about the volume today and what's going on and what's happening with Armistice. They have pre funded warrants and they have been exercising Those prefunded warrants, they are almost free and clear of all of them, which I think has been creating a lot of volatility. But as part of the pipe deal we did In early September, they as part of it, it was pre funded warrants that they could convert into common, which they've been doing over the last week. And at this point, They should be mostly out of those and I think that is also just creating an overhang as I've gotten a lot of questions about that from investors And that should be done or very, very close to being done at this point.

Operator

I'd like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call and you may now

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Earnings Conference Call
Digital Brands Group Q3 2023
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