Q3 2022 Digital Brands Group Inc Earnings Call
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Greetings and welcome to the digital brands Group third quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder.
Under this conference is being recorded.
It is now my pleasure to introduce your host Bill Davis.
Thank you you may begin.
Yes, good afternoon, and welcome to the digital brands third quarter 2022 earnings Conference call.
This earnings call may contain forward looking statements as defined in section 27, a of the Securities Act of 1933 as amended including statements regarding among other things the company's business strategy and growth strategy.
Depression, which identified forward looking statements speak only as of the date. The statement is made these forward looking statements are based largely on our company's expectations and are subject to a number of risks and uncertainties some of which cannot be predicted or quantified and are beyond our control.
Future developments and actual results could differ materially from those set forth and contemplated by our underlying forward looking statements.
These risks and uncertainties there can be no assurances that the forward looking information will prove to be accurate the company will be hosting a Q&A session at the conclusion of our prepared remarks. Please note. This event is being recorded.
So let me start by saying, we delivered strong revenue growth and continued operating leverage on our fixed cost in the third quarter.
In addition, we have several positive updates to the business, which I will discuss in detail.
First we reduced our debt significantly which allows us to factor I wholesale purchase orders. This creates a significant change in our working capital cycle in the past we had to fund all our production costs upfront.
Until recently this resulted in a four to five months negative working capital cycle, which is why we had to borrow money at times to pay for the upcoming product fabric and production.
Since October 1st we have been able to factor our purchase orders, which allows us to use that capital to purchase fabric and paper production. This is a huge change in our cash needs and working cash flow.
Is even more critical to our business given our second point, which is the significant increase in our Q1 2023 wholesale bookings versus Q1 2022.
Q1 wholesale orders for stateside alone are up over 50% from Q1 of last year.
Additionally, there's still is that success in wholesale bookings for Q1 2023 versus no wholesale bookings last year as it was direct to consumer only at that point in time.
These increases in wholesale bookings continue to show the strength of our brands and the demand from both the wholesale channel.
And which is also carrying over into the direct to consumer channel. In fact, this strength has led to several groups approaching us about licensing our brands.
Licensing revenue could add meaningful revenue streams that is extremely high flow through at there's eliminate costs associated with this revenue where we currently reviewing these opportunities and they are significant in nature and we're excited about the potential opportunity.
The third point is that we launched the Bally shop in October which is a single E. Commerce destination that features all our brands we have experienced strong results in consumer trend since we launched this multi brand site.
We believe this shows the power of our initial vision and business model and set a strong foundation to which we can add additional brands like sundry as we bring them into our portfolio.
We believe our business get exponentially stronger every time, we add a brand and we provide the customer with more options and styles across more brands and the deal flow. We're seeing is higher than we've ever seen given this current market, but we believe that will continue to grow our portfolio at significant scale over the next 12 months.
18 months.
We continue to achieve operating leverage on our fixed cost business as our results show our fixed expenses declined slightly year over year in absolute dollars. While we increased revenue, let me repeat that our fixed cost expenses declined slightly year over year in absolute dollars, while we increased our revenue.
Our net operating loss declined meaningfully year over year.
And as we continue to grow our wholesale and our E. Commerce revenue as noted earlier, we expect to continue to get leverage on these expenses and cash flow positive in the first quarter. This leverage will increase as we add more brands to the portfolio.
The detailed results for the third quarter 2023 compared to 2022.
Net sales were $3 4 million versus $2 2 million in the year ago quarter, an increase of 58, 3% year over year.
Net sales excluded zero point $4 million in deferred revenue, which is associated with the timing of when customers order were placed versus when they were shipped in our men's custom business.
There's a four to six week lag time between customers orders and when they actually get shipped even overseas Harper and Johns and then shipped to the customer. So again, we have to bear the cost of those fabrics to make up the suiting or the shirting or this workout or that the pant.
And then we're not able to recognize the revenue.
What happens is is when we do ship that in the fourth quarter, we're going to be able to recognize that revenue without the associated cost too.
To that product and that's just a GAAP accounting piece, so we will benefit.
Gross margin will benefit in Q4 within its due to the lagging timing.
Net sales were also negatively impacted due to state side wholesale order shipping after September 30.
A lot of times, we'll ship October 1st second or third and again due to GAAP accounting you only can recognize the shipping on the ship date, but the revenue associated with these stateside wholesale orders were shipped to our fourth quarter revenue as well. So as you can see our third quarter revenue would have been significantly higher just due to certain timing around actually.
Recognizing that revenue and all of that revenue will flow through into the fourth quarter results.
Gross margin was 48, 3% versus 55, 9% a year ago, a decrease of seven 6% and gross profit margin.
Gross profit margin was negatively impacted by five 1% due to the accounting treatment of deferred revenue as we discussed and the timing of the fabric cost in our men's costume business.
Benefit will shift into the fourth quarter as a benefit to gross profit.
In the fourth quarter from Harper and Jones will benefit from both a revenue as well as a gross profit adjustment that just has to do with the timing.
Additionally, our gross profit margin was negatively impacted by price increases and our production expenses during the third quarter, especially it state side.
Please remember that we set the retail price points for these products four to six months ahead of production as we are offering these products at wholesale shows therefore, when there is a price increase in our production we cannot change our pricing right away or during that period to reflect that price increase however, we can increase our <unk>.
Price points for the next period, which we have done we will experience the benefit of these price increases starting in the first quarter of 2023.
Yes. It was a one time event that will flow through into Q3, and some into Q4, but will not flow through in the first quarter and going forward and again, there's just a lag from as an example, Q1 shows.
Q1 shipments we were showing those in August September and October So we set the retail price than for the Q1 shipments. So we already knew that cost was there and we have since adjusted our retail pricing to reflect that cost and we will get that margin back at state side I.
I think that's really important because we are able to catch that up.
General and administrative expenses as a percentage of revenue decreased 38, 5% to 105, 8% of revenues versus 172% a year ago.
General and administrative expenses were $3 6 million versus $3 7 million, a $100000 lower than the year ago quarter. We.
We continue to get leverage on our fixed cost and we do not expect any additional increases in general administrative expenses or in our production expenses for cost of goods sold either.
Sales and marketing expenses were 35, 8% of revenue versus 64% a year ago, a decrease of 48%.
Sales and marketing expenses were $1 2 million versus $1 3 million a year ago, which was a $100000 less.
We showed our we slowed our digital advertising spend in the third quarter in advance of our Bailey shop rollout in October .
In October we redirected our advertising spend from each of our brand sites to our Bailey shop site, which features all our brands on a single site. This shift in our advertising strategy resulted in sales and marketing efficiencies going forward and we'll continue to do so and I think that's really important because we're not advertising against three or four.
Sites now we're predominantly advertising against one site, putting that dollars. There. So we can drive more traffic.
And as we stated we are seeing at the Baillie shop customers by multiple brands in a single cart, which shows the power of what we're doing because then our customer acquisition to acquire a customer is less than $15, whereas right now most digital customer acquisition cost is running seven.
Five to $125 I cannot express how important this is when you take a brand like sundry that has several hundred thousand if not million email customer people on their list and to be able to drive them to their site and acquire a customer for $15 went on average they were spending 200, they're sitting $280 both the.
CAC and LTV for our business is incredibly high and this is the power of our model right. Here is that we can drive down CAC, we can drive up L. T. B, we can cross merchandise across the brands as customers add multiple brands to a cart and the more data we have the more personalized we're able to get in.
And what we're able to show the customer in terms of their looks so as we look at the data if the customer is more athleisure or are there more prep, where theyre more tailored. We're then able to create looks and styles and email those customers based on those looks and styles and being able to acquire customers for $15 or less is even better than the go.
Days of social media, when Facebook and instead, even take talk just launched and I cannot stress enough. How this also changes our cash both near term, but also the profitability going forward as our LTV goes way up as well.
Distribution expenses were two 9% of revenue versus four 9% a year ago, a decline of 41, 4%.
Distribution expenses were 98000 versus 105000, a year ago, we expect to continue to benefit from a reduction in our distribution expenses associated with operating one distribution center versus two distribution centers as we collapsed stateside to D. C into our single D. C that we have now.
Loss from operations was $2 6 million versus $7 9 million a year ago, which is a decline of $5 3 million from a year ago, which again shows the leverage we're getting on our business and that we expect to continue to get especially with our Q1 wholesale bookings coming in.
Interest expense was $2 3 million versus 0.5 million a year ago I think the most important thing here is going forward interest expense should be less than a 150000 a quarter due to the elimination of the debt that we discussed.
Net loss attributable to common stockholders was $4 9 million of which $2. Three of that was interest expense. This was 926 per diluted share which includes the interest expense compared to net loss attributable to common stockholders, a year ago of $8 9 million or $75.83 per diluted share a year ago.
So in closing we believe this quarter is the strongest reflection yet that we are on a clear and short path to profitability with our current brands. We have incredibly strong Q1 wholesale orders, we believe the sundry acquisitions should create even more positive EBITDA upon acquisition and then as you can see the Bailey.
<unk> is driving unbelievable.
SaaS, both in traction across brands and lowering our customer acquisition costs on line and driving up our a O V, which is also driving our LTV. So our E. Commerce continues to get leverage in our wholesale continues to accelerate so with that I will open it up to Q&A. Please.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue. So partition.
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One moment, please while we poll for questions.
Thank you. Our first question is from a private Investor. Please proceed with your question.
Okay.
Hello, first I want to congratulate you on an awesome quarter.
Really impressive growth and then I wanted to ask you.
At what point would you guys consider going private there's such a deep.
Disconnect from share price and the numbers you guys are bringing in.
Yeah. Thank you for your question. It's a it's a really interesting question and something that we're discussing internally I think at some point you've got to look at this meaningfully deep deep disconnect and we know what we would get on the private markets. We do have <unk>.
Very high interest in this as you can imagine one of the big things that's happening in this world is especially with the Apple iOS privacy and also with the department store shrinking in the wholesale channel, which we don't have a lot of exposure to is you're saying that these brands are needing to what they call platform or come together to actually.
Really drive growth or survive and I think what we're hearing from the conversations. We're having is that we have proved that this works and that we know how to do it and then if we could come into our portfolio a P of <unk> brands and bring this expertise and wrap all their brands up in there and then go public nine months later.
Or a year later at $500 million in revenue then there is a massive arb for them. So these are obviously conversations that are that have been had in having and its something well, we honestly I have to look at because at some point. If there's this much of a disconnect. It doesn't make sense to stay in the private market I mean, the public markets. Unfortunately.
And to be honest I mean, I did equity research for a decade, I don't quite understand that dislocation either.
I guess, it's just a nano cap world, but we do know that there is a lot of interest there and given what even broken companies are going for in the private markets. There's incredible interest in what we've done in doing and the massive dislocation and the reality of our market cap versus our results.
Awesome. Thank you yeah, I just I wanted to reiterate I, you know I find such value here and the disconnect and I fully believe with your guys' position and low debt that the sky's the limit from here. If you guys keep putting up these growth numbers, but thank you congrats again.
Yes, my definitely and thank you and by the way for what it's worth I do think that was a big piece of it was one of the things that had held back a lot of these discussions was our debt load and now that that's cleared and.
And the equity hasn't reflected that at least the equity price. It's now very interesting because it's just an equity purchase versus having to add all this debt to the transaction and buy it out which is creating even more of an arbitrage and I think that's kind of what's been holding does discussions back which are now no longer holding those discussions back.
And I think you know we have to think what's best for the shareholders and if we're getting significantly larger interest and offers at the at the private level, we have to consider that and we will consider that and it's definitely a deep deep discount to reality in our opinion.
Absolutely actually have one more question that that brings that.
Are you guys actively looking for more acquisitions I know one sundry officially closes that this was going to be a big one for you guys. But are you guys actively talking to other companies you know given the rate environment I would assume a lot of smaller companies are looking you know to get bought out and I would think that this is a strong.
Strong position for you guys to capitalize on.
Yes, and in fact, we've seen a lot of that inflow as well I would say that we think that there's a big opportunity here and we do think its accretive I know sometimes people look at it as one is dilutive, but you've got to look at the overall accretion, especially at these levels.
Even if you were to issue shares with sundry Youre doing as we've stated I think theyre doing north of 20, and we're north of 30. So you can start to do that math and it just there's even more of a dislocation there and there is we are seeing more inbound requests than we ever have.
Really good companies that are trying to figure out what to do here in raising capital.
I know in the private market a lot of times might come with a preferred which means they are getting multiple amount for their money back which is less interesting to a lot of these founders and additionally, what's happening too is a lot of these companies have been in business for 10, 12, 15 years and the founders want an exit and they don't want to continuing to stay private.
So we are seeing a lot of deal flow and we do expect if.
If we do stay in the public markets, we will continue to be acquisitive, but if we're not also going to get credit for building 50, 90 $125 million revenue business over the next nine months, there's not really a reason.
To be in the public markets, especially if we're going to trade it two and a half to $3 5 million of market cap. We our market cap is literally probably roughly a little less than half of what our Q1 revenues will be which is pretty interesting and obviously pretty pretty compelling for a lot of outside people.
Absolutely. Thank you and congrats again.
Thanks.
Thank you. Our next question is from.
Charles whereas learn Maskey private Investor. Please proceed with your question.
Yes, hi, congratulations on the deal.
<unk>.
I haven't seen anything on the Amazon exposure can you talk to us about that.
Yeah, we've been happy with it it's been slow and steady it it took a while warmed up and it's just been a nice slow and steady piece. We're learning a lot. We use a third party agency. There are some things we're looking at from an acquisition candidates that actually specialize in this and have a direct relationship with them. So we've.
Moving it enough that we're actually looking and seeking or even getting inbound requests from Amazon driven companies that have those relationships. The question is for US as you know do you put a state side on there or do you put a sundry on there does it or does not hurt the brand.
But we do think the other opportunity is to create some of our own private label businesses using our current brands and under a different brand name.
And making maybe more overseas and using that to drive there as well, which we think is a really interesting growth opportunity as well. So I would take a distilled like Theres no reason, we couldn't make the denim in Pakistan and make a lot of the same products.
We see a lower quality product, but also the price point would be significantly less as well. So we're just kind of scraping that data and look and see what's working what's not working where we can lead in more and realizing that.
Having potentially an Amazon based company in our portfolio would really be an interesting play here as we look at these strategies based on the success we've had.
Alright, thank you so much.
Yeah. Thanks for the question.
Thank you. Our next question is from Reed <unk> with Roth Capital. Please proceed with your question.
Yeah.
Hello first congrats on a solid quarter very excited about 2023 for you guys most definitely.
I'd like to piggyback, a little bit off of some of the conversations here and focus on your agreement with Black Hawk capital.
Could you touch on your Securities purchase agreement with Blackrock capital and what that means for your company, but some of that debt restructuring.
Yes, so black Oak had the first lien position on our debt, which is in the beginning of the call is talking about how we can start to factor now. That's the reason we can factor because they've converted their debt and preferred equity and then that preferred equity can get converted into common at up to 500.
Dollars, a month and they're maxed out at that so that it will take about 14 months from when they start selling I believe there their average price per share is roughly $9 31.
I'm not mistaken so if they were to sell at this level they would actually.
Turning less money to their debtholders, and which they obviously do not want to do so I don't think they would sell them based on conversations.
They want to return par or above par level, which would be above 931 based on the conversations that I've had with their managing director and they're they're definitely in no hurry. They think this is an incredibly undervalued asset as well they do their job.
And Boston company. So they also set valuation so they're very clear on that's the big reason they converted as they they one of the reasons as they saw that there was a massive disconnect and they can actually return significantly more equity than that given the dislocation of the valuation.
So that's the opportunity there and that's so again, they're limited which is nice and they were very open to that they had no problem with it they don't want to put pressure and they do think it's undervalued, which is why they converted into the equity.
And they'll just be very smart about it but also they are in no hurry and they think it's incredibly undervalued and they get multiples of their debt and return that to their debtholders.
Thank you that's very important to touch on.
I appreciate the clarification, there that was one of the potential flagged a while ago that I was seeing but the more that I've read the filings I'm hearing this on the call. It sounds like you know.
It would really make no sense for them today.
Current moment so.
You're very much I appreciate it.
Yes, definitely and again like I talked to him probably weekly and they they definitely feel like there is a much bigger opportunity for their their holders and they have some as all portfolios do some brands that are underwater and so this would help offset those as well if they return more than their principal amount that they converted.
It into equity, which there which is not lost on them.
But exactly when they converted into equity they were making their decisions.
Right at that point, which I think shows the true colors of what their intentions are anyway. So.
Alright, well thank you.
Yes, and by the way I cannot stress enough the ability to factor now, which we have not had I just can't tell you. We're moving from a negative five months working capital cycle to a positive three months working capital cycle. I mean that is significant especially as our wholesale continues to grow especially brands like stateside over 50.
3%.
Being able to use cash from the factor as opposed to having to go to our balance sheet to buy the product and make the product by the fabric is a massive delta and our cash needs.
Definitely that makes perfect sense.
Yes, I'll just I'll, just add as an institutional investor here and looking for undervalued opportunities, especially with how the markets have been <unk> has been one of my top watches and then I was waiting for.
Q2, Q3 earnings to come out here, especially going into the end of the year end of the season.
The most important thing was listening a little bit into your Q1.
Projected wholesales and orders that's very important to me as well so.
Honestly just congratulations on some good work of recent.
And I'll definitely continue being a shareholder shall thank you.
Thank you.
Thank you there are no further questions in the queue at this time.
To hand, the floor back to Hell Davis for any closing comments.
Yeah. Thanks, everyone for joining US you can see our momentum continues we're getting leverage on the fixed cost I'd also say as you think about different things you should probably look at the comps were also often asked what the comps are you guys 8-K brands out there you've got solo brands out there you've got more be Parker, which is DTC one.
You've got all birds, and then you've got ourselves and I think going back to what was asked before there are some dislocations out there and you know all we can do is execute and make the right decisions for shareholders, but the business is in a really strong state. We're excited we're excited about the sundry acquisition and continue to.
Scale, whether it's in the private or public World I think we can figure it out and I think that's why we've got a lot of interest in how the platform. These companies strip out cost both just from an Opex perspective, but also from a marketing DTC lowering the CAC significantly driving LTV, which is really critical in the world. We're in today.
So we're excited about what we see both in terms of potential pipeline of acquisitions in terms of the different options that we have at the table and our continued growth at our brands both across DTC as well as wholesale.
Thanks, everyone and have a good night.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.