Q3 2024 Digital Brands Group Inc Earnings Call
Speaker Change: [music].
Greetings and welcome to the digital brands Group third quarter 2024 conference call. At this time, all participants are in a listen only mode.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.
I'll now turn the conference over to your host John Mcnamara you may begin.
John Mcnamara: Thank you.
Afternoon, everyone and welcome again to digital digital brands.
John Mcnamara: 'twenty 'twenty four third quarter earnings conference call and webcast.
With us on the line from management as he'll Davis, Chief Executive Officer, who will provide an overview of the quarter.
John Mcnamara: At the end of the prepared remarks he'll respond to a few questions that were submitted prior to the conference call.
As usual, we would remind you all that this call may contain forward looking statements as defined in section 27, a of the Securities Act of 1933 as amended.
John Mcnamara: It may include statements regarding the company's business strategy and growth strategy expression.
John Mcnamara: Expressions, which identify forward looking statements speak only as of the date statement is made.
Speaker Change: 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 the company's control.
Speaker Change: Future developments and actual results could differ materially from those set forth in these forward looking statements.
Speaker Change: In light of these risks and uncertainties there can be no assurance that the forward looking information will prove to be accurate.
Speaker Change: With that I will now turn the call over to Hill Davis go ahead Hill.
Hill Davis: Good afternoon, and thank you John.
Hill Davis: As we stated in our press release, our third quarter was the last quarter, we could definitely focused on paying down debt and liabilities given the soft macro economy and the overhang of the election.
Hill Davis: Starting in October this year, we transitioned from cleaning up the balance sheet to focusing on increasing top line growth.
Hill Davis: As we stated in our press release yesterday, we partnered with inter Commerce to drive digital revenue. This partnership has already led to a 34% increase in daily digital revenues and a 7% increase in average order volume during the 17 day period, which was October 22nd through November 7th and then this was prior to the 30 days they took O.
Hill Davis: Over which was September 22nd October 21.
We believe these results reinforce the positive value of our partnership with Vanguard Commerce, we intend to add the agency's email in Essen as campaigns, which is text messaging campaign services starting desk week. This partnership was the first step in a multistep growth strategy, coupled with the launch of <unk>.
Hill Davis: Other initiatives through this partnership which we are in the process of watching or will launch are as follows adding several apps to our shop apply platform that they have set increase conversion rates of their other brands. They work with by 20% plus selling on other digital platforms, such as Amazon and Tech talk which we plan to launch in Q.
Hill Davis: One launching influencer campaigns. This is going to be a big focus for us partnering with influencers and leveraging different platforms.
Hill Davis: And with favorite media buyer side Theres a lot of reception now for that launching limited edition product capsules every month that are only available online in small quantities that have exclusive pricing fabrics and design and this really follows the sneaker industry in terms of the shoe drops. So we plan to focus on that for all the brands for our DTC channel.
Hill Davis: Please note that we had none of these before and going forward, we will have all of these.
Hill Davis: There are also other major initiatives in the works along with these noted above which we'll announce as we get closer to launching those.
Hill Davis: So I think what I want everyone to really take away from this is Q3, you had probably one of the worst macro economies you add the election, and then you had us focusing on paying back debt and liabilities and that's really important because we feel based on everything we see now that that was the bottom and it was into.
Hill Davis: Because it did not make sense based on our conversations with other companies to invest heavily in digital marketing and as everyone's noted, which I'll talk about here in a second the wholesale and the consumer has been soft but not only in addition to these that's important the company also will benefit by an increase of over four and a half.
Hill Davis: <unk> million dollars in earnings in 2025 that is associated with amortize noncash expenses, which include state sides goodwill concluding at the end of year at the end of this year as well as $3 1 million in amortized interest expense, which was also solid cash ending it.
Hill Davis: End of this year. So again next year will already see a benefit of four and a half million dollars in earnings associated with those two items. In addition to that we took a meaningful wholesale price increase had sundry, which is met zero resistance and that allows you add more than 500000, a year to gross margins.
Hill Davis: And we know that it's hit zero resistance, because we've been selling wholesale for spring into the market already.
Hill Davis: As you can see this really reflects a major inflection point in our business as we are shifting for cleaning up the balance sheet into a growth mode. Given the majority of our cash was being used to pay down debt and liabilities, we cannot invest properly in growth even if we invested in growth it would've been in a weak macro consumer market that is impacting all retailers from.
Hill Davis: Home depot to Levi's to Lulu Lemon.
All the fast fashion brands and even has impacted all the luxury brands. So any growth investments during the last nine months would have been met with a soft consumer market based on the publicly reported results of these brands.
Hill Davis: Now that the election is behind us and we feel that the consumer has stabilized and the balance sheet has been meaningfully cleaned up we feel now is the right time to make this transition into growth.
Hill Davis: Before we can do that we needed the right digital partner and we needed the cash flow in order to do this we believe that we found the right digital partner vein or commerce and we also now have the cash flow to invest in the growth.
Hill Davis: We're extremely excited to move into this transition and are already excited about the results. We have seen thus far with only one piece of the product or the growth initiatives being rolled out with others coming starting this week and going forward, so with that let's discuss the third quarter results.
Net revenues were $2 4 million compared to $3 3 million a year ago I think the important thing here is we decided to walk away from our largest wholesale accounts due to a single digit gross margin before the required additional expenses to manage that account, which include making multiple samples because they wanted their own <unk>.
Hill Davis: <unk>.
Hill Davis: This meant that this account was net negative and cash contribution the wallet added revenue we lost money on it so going forward, we will lose this revenue, but we will increase our profitability. This was over $800000 of the difference in the year over year difference and I think that's really important to understand is that while it impacts.
Revenue.
It did not it actually improved profitability and will continue to improve profitability as we move through next year. Net revenues were also negatively impacted by limited digital advertising spend which we've discussed which resulted in lower E. Commerce revenue and also as we discussed is adding viner commerce, we've seen a meaningful increase in that digital revenue.
Hill Davis: And that's with them just a b testing product right now with content that we had were re shooting a lot of content with them next month and there are getting a good gauge on what types of ads are working best but we will shoot that content best into will show you. The content based on what ads are performing best.
Hill Davis: And we just had a call about that today.
Hill Davis: Gross profit margins were 46% compared to 52, 3% a year ago. The biggest factor in this decline is actually the fixed cost associated with our gross margins, which includes the entire warehouse rent and all the labor expenses associated with it our pattern makers and sellers and as well as some design member experiences so keep that in.
Hill Davis: There's a lot of fixed costs, our gross profit margin. So these will naturally lift as our revenue less and that that's really important to understand is that fixed cost nature gross profit margins were negatively impacted by lower.
Hill Davis: The digital revenue associated with the limited digital advertising revenue in the quarter gross profit dollars was $1 1 million compared to $1 7 million a year ago.
Hill Davis: G&A expenses decreased $1 3 million to two 4 million compared to $3 $7 million a year ago that is a significant reduction year over year to a tune of $1.3 million also included in our G&A was $1 6 million in noncash expenses, which includes goodwill.
Hill Davis: <unk> expenses for the brands, we've acquired depreciation and other items like that G&A also expenses declined sequentially from the last quarter by over $500000. So you can see we continue to get leverage on our cost savings and the intentional way, we're managing the expenses and now that we're growing.
Back into growth mode, we're excited to see what's going to happen there.
Hill Davis: Delta marketing expenses were $655000 compared to $1 2 million a year ago sales and marketing expenses ratio was $26 nine compared to 35, 3% a year ago. Please note that the majority of the sales and marketing expenses is the marketing team and as we stated we have now outsourced our sales and marketing team does.
Hill Davis: Wayne or commerce, so you'll see this cost go down as well.
And.
Hill Davis: Supplement that increased digital dollars going forward.
Hill Davis: Net loss was $3 5 million compared to a net loss of $5 4 million a year ago. This includes a $1 $6 million loss in non cash expenses and to that point as you can tell even though our revenues were lower our net loss was significantly lower a lot of it attributable to the fact that that wholesale.
All account was highly negative.
Hill Davis: Starting in Q1 next year, our interest expense will decline to a 105000 from over $700000 a quarter due to the completion of the amortization of the interest expense debt at year end.
Hill Davis: This means the annual benefit of this interest expense being fully amortized is $3 $1 million a year that will benefit net earnings in fiscal 2025.
Hill Davis: Net loss for diluted share was $1 63, compared to a net loss of $14 55, since a year ago a significant increase.
Hill Davis: So in closing what I'd like to say and I think it's really important is that we're really excited about this transition that we're making from having to really focus on cleaning up the balance sheet and a really difficult macro market into now more of growth. We have a strong partner in vain or commerce and already experiencing better results.
Hill Davis: And these results are only from the digital advertising channel only and do not include our text messaging or E mail, our influencer partnerships, our monthly capsule collections and other initiatives, we have not announced but are finalizing in addition to that 2025 will experience a four and a half million dollar earnings benefit.
Hill Davis: Versus 2024. This is a significant lift in 2025 earnings and that is before any benefit from the growth initiatives noted above.
Hill Davis: That concludes our third quarter 2024 conference call I'm going to read through some questions and answers that were sent to us in advance of the conference call.
Hill Davis: The first question is what does the debt convertible debt looked like on the balance sheet. As we stated we paid back $1 $3 million in that convertible debt. So the company has no convertible debt.
Hill Davis: Left on its balance sheet and the only debt that we have is longer term debt and that is patient data as well. So the we've really cleared that overhang, which is really important because that pressure is not there and that's going to allow us to really focus on growing this moving forward.
Hill Davis: Also there was a question about just the vendor relationship and how it came about and what it looks like so we didnt vein or media calls they had reached out to us but felt like we were too small and didn't have enough going on to make it happen. We follow back up with them recently, especially with the launch of <unk> and as a dog.
And what we're doing they really got excited about it and in fact at first they had mentioned that they probably weren't right for us, but then as we circle back they they dug in a little bit and said you know what this makes a lot of sense, even though the tuned to the fact that it's a heavily incentivized percentage of revenue deal so they're putting their money where their mouth.
Hill Davis: There's and put that in perspective on every call and we do a couple of calls a week. We have 15 people from their team on the call today are highly invested in this and I think that's really important.
Hill Davis: And I just I'm really excited about what we can do because we have a pure performance marketing group. That's worked with a lot of brands that have scaled a lot of brands now fully focused on this there's no way we could replicate this.
Hill Davis: Bench, if you will in terms of depth and width and knowledge in any way on our own without spending millions of dollars and so we're excited about what that is and what that's going to bring and we're really excited about creating some really amazing content starting in December and going forward and just them really taking this over I mean.
Right now, we've just started spending a little bit more than what we've been spending I mean, we're only spending about $500 a day, that's it and we're already seeing a meaningful lift so theyre a b testing the results and they're seeing what works best and based on that we plan to issue content in the first two weeks of December based on the type of results that.
Hill Davis: Our work in the best and we plan to shoot that with Influencers and really lean into the influence or heavy world. We're excited about what that can bring.
Hill Davis: And then finally.
Hill Davis: I just want to really iterate that this this Q2 was the revenue decline was really driven by our wholesale brand that was actually net negative for us on the operation margin. It was about 7% gross margin and net negative on the operating margin. So while the revenue took a massive hit the <unk>.
Hill Davis: Gross margin will increase significantly as well and when I say gross margins I mean absolute dollars flowing plus the price increase at sundry and so we're excited about that and we're actually you've had several major freak out to us that we're in discussions with two add sundry and state side too and that's another reason we just.
Hill Davis: Allied to drop them is that these other majors have just as big of a reach with much better margins and much higher quality brand name associated with them. So we're excited about where that is as well so.
Speaker Change: That concludes the quarterly conference call I appreciate everyone's time and everyone have a nice day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.