Q3 2023 Digital Brands Group Inc Earnings Call
Speaker 1: ... estimated call start time...
Hum.
Estimated called start time.
Speaker 2: Would you still like to begin at 33 minutes past the hour?
Would you still like to begin at 30.
<unk> 33 minutes past the hour.
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Speaker 1: Okay, excellent. So I wish everyone a good meeting today and we will be going live here at 33 minutes past the hour.
Okay excellent so I I wish everyone. A good meeting today, and we will be going live here at 33 minutes past the hour.
That sounds good.
Excellent.
Thank you.
Welcome. Thank you gentlemen.
Yeah.
Okay.
Okay.
Okay.
Yeah.
Speaker 1: We are going live in 5, 4, 3...
We are going live in five.
Four three.
Speaker 1: Thank you for standing by and welcome to the Digital Brands Group Inc Q3 2023 earning.
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.
Speaker 3: Good afternoon, everyone, and thank you again for joining us on the Digital Brands 2023 Third Quarter Financial Results Conference Call.
Good afternoon, everyone.
You again for joining us on the digital brands.
23 third quarter financial results conference call.
Speaker 3: With us on the line from Digital Brands is Hill Davis, Chief Executive Officer. He'll begin the call with a brief overview of the quarter, and then we'll open up the lines for questions.
With us on why from digital brands is he'll Davis, Chief Executive Officer, who will begin the call with a brief overview of the quarter.
And then we'll open up the lines for questions.
Speaker 3: As usual, we would remind you that this earnings call may contain full revoking 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.
As usual, we would remind you that this earnings call may contain forward looking statements as defined in section 27 of the Securities Act of 1933 as amended.
Any statements regarding thing as a company.
The company's business strategy and growth strategy.
Speaker 3: 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.
Expressions, which identify.
Speak only as of the date. The statements made these forward looking statements are based largely on our company's expectations.
Subject to a number of risks and uncertainties some of which cannot be predicted or quantified and are beyond the company's control.
Speaker 3: future developments and actual results could differ materially from those set forth.
Future developments and actual results could differ materially from those set forth.
Speaker 3: 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.
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.
Speaker 3: With that, I'd like to turn the call over to Hill Davis. Go ahead, Hill.
I'd like to turn the call over to help Avis go ahead al.
Speaker 4: Thanks, Sean and good afternoon everyone. We are now halfway through our 4th quarter and we've also closed our 1st quarter 2024 wholesale.
Thanks, Sean 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.
Fourth quarter, and our first quarter wholesale bookings, we are pleased to announce that we have turned foundry around.
Speaker 4: Thundery set their bottom in August , and it has been on a steady increase every month since...
And reset their bottom in August and it has been on a steady increase every month since then.
Speaker 4: 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.
For example, we have tripled sundries first quarter 2024 wholesale bookings versus the brands 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.
Speaker 4: 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.
Additionally, sundries fall sweater sold out so quickly at wholesale that Anthropologie has Ashford 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.
Speaker 4: In fact, other wholesale accounts have stated they under order for fall and holiday for sundry, given the products are selling out on the floor within weeks.
In fact other wholesale accounts has stated they under order for fall and holiday for sundry given the products are selling out on their floor within weeks.
Speaker 4: 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 day, we just learned that another major retail chains and our largest wholesale accounts. So all through 57 per cent foundries holiday sweaters in one week.
That is correct one week. They now also want to go deeper in there by next year.
Speaker 4: to turn around and sundry along with the increase in our revenue from our other brands.
The turnaround in sundry along with the increase in our revenue from our other brands coupled with the cost synergies have 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.
Speaker 4: coupled with the cost synergies has resulted in meaningful operating leverage.
Speaker 4: 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.
This assumes that current e-commerce trends as is.
Speaker 4: And these trends have been softer than we expected due to the soft macro environment that other retailers and DTC companies have reported.
And these trends have been softer than we expected due to soft macro environment that other retailers and <unk> companies have reported in fact this is one of the most promotional periods, we've ever experienced with promotion starting much earlier and at much higher discounts than we have seen in the past and based on the other retailers out of.
Speaker 4: 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.
Speaker 4: And based on the other retailers that have reported earnings as well as my discussion with private companies, everyone is seeing and experiencing this.
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.
Speaker 4: even including Home Depot today, Target, Levi's, Nike, etc.
Speaker 4: Despite the softer e-commerce trends, we still generated internal free cash flow in October .
Despite these softer ecommerce trends, we still generated internal free cash flow in October.
Yes.
Which will be used.
Speaker 4: Sorry, my AirPod died. Despite these office software e-commerce trends, we still generated internal free cash flow in October , which we use 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.
Sorry, My Air Pie died despite these out the softer ecommerce trains, we still generated internal free cash flow in October, which we used to pay down old accounts payable and that 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 taught.
All of us that they value the most in fact, the monthly internal free cash flow should increase in April and again in October.
Speaker 4: In fact, the monthly internal free cash flow should increase in April and again in October .
Speaker 4: 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.
The increase in October alone is over 60000, 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 ret.
Speaker 4: And let me repeat that, just starting in 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.
Let me repeat that just starting in October alone, we will pick up an additional $60000 in free cash flow just from pain, a normalized threat versus a rent plus old rent due from COVID-19.
Speaker 4: We are also finalizing a lease for an outlet store that would take over an existing outlet location that would open approximately March 1st. The brand in this store currently does 1.8 million a year, which is 150,000 a month.
We are also finalizing a lease for an outlet store that would take over an existing outlet location that would open approximately march 1st the brand in this store currently does 1.8 million a year, which is 150000 a month.
Speaker 4: 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. 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.
It cost approximately $45000 a month to operate and since we have a lot of old foundry product from the acquisition. We will have no cash calls for a cost of goods sold this should at a minimum of $50000 to monthly cash flow, assuming the revenues dropped to $100000 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 $100000 a month on top of our current amount.
Speaker 4: based on the $4.5 million in wholesale bookings.
Based on the 4.5 million in wholesale bookings.
Speaker 4: plus our eCommerce revenue, plus store revenue, plus.
Plus our ecommerce 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.
Speaker 4: plus licensing income from our licensing deal, we expect to achieve EVADOP neutral to positive in the first quarter.
Speaker 4: And based on the anthropology 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 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 <unk>.
Speaker 4: So again, $6 million in quarterly revenue is EBITDA neutral.
Speaker 4: And again, based on our current wholesale bookings for Q1, which are booked and are purchase orders that are in our system and binding.
Current wholesale bookings for Q1, which are booked and our purchase orders that are in our system and binding plus our ecommerce trends plus the store revenue from the outlet.
Speaker 4: 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.
Stay 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 closer to a 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 firm.
Speaker 4: 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.
First half an EBITDA positive in the second half.
Speaker 4: which is also why our internal free cash flow increased.
Which is also why our internal free cash flow increases we believe these fundamentals and matrix 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.
Speaker 4: 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 market.
Speaker 4: So with that, let's discuss third quarter results.
So with that let's discuss third quarter results.
Speaker 4: Net revenues increased 22.5% to 3.3 million compared to 2.7 million a year.
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 and jellies for both the third quarter of 2022 and 2023.
Speaker 4: Please note these results exclude the revenue from our disposition of Harper and Jones for both the third quarter of 2022 and 2023.
Speaker 4: Most importantly, this represents the lowest point of Sundry's wholesale revenue based on our current fourth quarter trends and first quarter wholesale bookings.
Most importantly, this represents the lowest point of sundries wholesale revenue based on our current fourth quarter trends and first quarter wholesale bookings.
Speaker 4: as Q1 2024 wholesale bookings are triple the third quarter wholesale revenue.
As Q1 2024 wholesale bookings are triple the third quarter wholesale revenue.
Speaker 4: 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.
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.
Speaker 4: 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.
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.
Speaker 4: G&A expenses, including non-cash items, increased 25.3% to 3.7 million compared to 3 million a year ago. G&A expenses, including non-cash item, excluding non-cash item expenses, decreased 30.8% to 1.6 million compared to 2.3 million a year ago.
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 item mix, excluding noncash item expenses decreased 38% to $1 6 million compared to two point.
3 million a year ago.
Speaker 4: G&A expenses included $2.1 million in non-cash expenses associated with depreciation and amortization, amortization of loan discount, and stock option.
G&A expenses included 2.1 million in noncash expenses associated with depreciation and amortization amortization of loan discount and stock option expense.
Speaker 4: Sales and marketing expenses increased 12.6% to 1.2 million compared to a million a year ago. Sales and marketing expense ratio was 35.3% compared to 38.5% a year ago.
Sales and marketing expenses increased 12, 6% to one 2 million compared to 1 million a year ago sales and marketing expense ratio was 35, 3% compared to 38, 5% a year ago.
Speaker 4: Net operating loss excluding the non-cash charge was $1.2 million compared to a loss of $2.5 million a year.
Net operating loss, excluding the noncash charge was $1 2 million compared to a loss of $2 5 million a year ago.
Speaker 4: So we cut our net operating loss in half on very low revenue. In fact, revenue that's significantly below just our Q1 wholesale bookings alone.
So we cut our net operating loss in half on very low revenue in fact revenue that significantly below just our Q1 wholesale bookings alone.
Speaker 4: Net loss per diluted share attributable to common stockholders was $5.4 million or $14.55 per diluted share compared to a loss of $4.9 million or a loss of $223.83 per diluted share a year ago. Net loss per diluted share excluding non-cash expenses was $2.6 million or $8.92 per share.
Net loss per diluted share attributable to common stockholders was $5 4 million or $14 55 per diluted share compared to a loss of $4 9 million or a loss of $223.83 per diluted share a year ago.
Net loss per diluted share, excluding noncash expenses was $2 6 million or $8 92 per share.
Speaker 4: In closing, as we've 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.
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 Companys underlying assets and operating performance. We believe the first quarter 2024 wholesale bookings and monthly internal free cash flow.
Speaker 4: We believe the first quarter 2024 wholesale bookings and the monthly internal free cash flow illustrate how significant this dislocation has become.
Illustrate how significant this.
Dislocation has become.
We are on an 18 million dollar wholesale revenue run rate for 2024 and that does not include any revenue impact from our E Commerce revenue our store revenue for our licensing income.
Speaker 4: Finally, we should generate more than $6 million in internal free cash flow for 2024.
Finally, we should generate more than 6 million internal free cash flow for 2024.
Speaker 4: We have several options that we can pursue, all of which should increase shareholder value meaningfully. We know that there is significant demand for
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 shall as well we're extremely serious about these options as it is crystal clear.
Speaker 4: We're extremely serious about these options as it is crystal clear.
Speaker 4: 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.
That we're 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 4: 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.
And our internal free cash flow as I mentioned should increase as we move through 2024 based on the outlet store in the rent payments as noted earlier.
These do not seem to matter to the public markets. At this time, which is why we are moving forward with the strategic alternative Pat. Thanks for your time and we look forward to the continued momentum.
Speaker 4: This concludes our 2023 third quarter's earning call and let's open it up to Q&A.
Yes.
Concludes our 2023 third quarter's earning call and let's open it up to Q&A. Please.
At this time I'd like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile any questions.
Again, if you'd like to ask a question. Please press star one on your telephone keypad now.
Speaker 1: Again, the floor is now open for your questions. If you'd like to ask a question, please press star one on your telephone keypad.
Again the floor is now open for your questions if you'd like to ask a question. Please press star one on your telephone keypad now.
Speaker 4: And I have a couple of questions that have come across through email or social media as well.
Now I have no questions I have a couple of questions that have come across an E mail or social media as well.
There are no questions at this time Sir.
Speaker 4: Yeah, so let me, a couple of questions we've gotten. One is...
Yeah. 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.
Speaker 4: Do we expect our gross margins to continue at this level? And the answer is yes we do.
Speaker 4: And there's a few reasons for that. And the biggest reason is there's a lot of fixed costs in our gross margin. So, for instance, when we make the samples. For the wholesale, our distribution center, rent.
There's a few reasons for that and the biggest reason is there is a lot of fixed cost in our gross margin. So for instance, when we make the samples for the wholesale or distribution center rents our labor back there. So where's powder makers. So there is a high fixed dollar amount so as our revenues increase we get leverage on that.
Speaker 4: our labor back there, sewers, powder makers, so there's a high fixed dollar amount. So as our revenues increase, we get leverage on that fixed cost.
Fixed cost additions.
Speaker 5: Additionally, we also expect to cut another half a million in cost as we move through. Now, this is in the OPEX line items, but we'll cut another half a million dollars in cost in kind of Q1 and going forward as well. And that's on an annualized basis. 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.
Additionally, we also expect to cut another half a million in cost as we move through now this is in the Opex line items will cut another half million dollars in costs in kind of Q1 and going forward as well and that's on an annualized basis, but we do expect gross margins to hold at this level or potentially increase as well, especially as we get into Q4.
We're able to leverage those fixed costs that are associated in our gross margin.
Speaker 5: The other question is, are we frustrated with where we are and are we serious about pursuing these strategic alternatives? And the answer is yes and yes.
The other question is.
Are we frustrated with where we are and while we are serious about going there.
Pursuing these strategic alternatives and the answer is yes, and yes, I mean, it's clear like I said in the board feels the same way that we're just not getting the appreciation for kind of the turn we built built in the business acquisitions. We've made the leverage we've created the revenue growth in the internal free cash flow and at this point, we are actively pursuing it as everyone.
Speaker 5: I mean, it's clear, like I said, and the board feels the same way that we're just.
Speaker 5: 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. 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.
I was on the call we don't issue a lot of PR. We did issue PRL Nelson that 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 were achieving.
Speaker 5: we're achieving. And I think Q1 is a perfect example of that. And I think October free cash flow as well as the Q1 wholesale bookings.
Think Q1 is a perfect example of that 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 as 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.
Speaker 5: and just the feedback we're getting from the wholesale accounts on how well our products are selling through now has really
Speaker 5: shown us that we need to find the best path for shareholders and it does not seem like the public markets at this point.
Speaker 5: Those were the major questions that I got, either email or social media. So, I guess with that, we can conclude the call.
That's those are the major question that I got either E mail or social media I guess with that we can conclude the call.
Speaker 4: I would like one more question. Sorry. Sorry. One more question. I just got.
I would like to one more question sorry.
Sorry, one more question I just got.
Speaker 5: Someone asked about the volume today and what's going on and what's happening with armistice. They have pre-funded warrants.
Someone asked about the volume today, and what's going on and what's happening with our Mr. Saf pre funded warrants and <unk>.
Speaker 5: and they have been exercising those pre-funded warrants.
They have been exercising those pre funded warrants.
Speaker 5: 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 created an overhang, as I've gotten a lot of questions about that from investors.
Our almost free and clear of all of them, which I think has been operating a lot of volatility, but as part of the pipe deal. We did in early September.
As part of it was pre funded warrants that they can convert into common which they've been doing over the last weekend at this point they should be mostly out of those and I think that is also.
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.
Speaker 5: And that should be done or very, very close to being done at this.
Speaker 1: 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 disconnect.
I would 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 just connect.
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