By M. Marin

NASDAQ:DBGI

Digital Brands Group (NASDAQ:DBGI) is an emerging apparel retailer pursuing a strategy to leverage and cross-promote its growing portfolio of clothing brands via a selective buildout of bricks-and-mortar sites and expanding online and wholesale presence. Management cites its measures as a way to “reshape traditional retail,” as DBGI believes that traditional channels such as online and department and specialty stores face growing challenges as competition for market share intensifies. The company has had success cross-promoting its proprietary Bailey’s collection with other in-house brands and is optimistic that cross-merchandising its labels via online and in-store channels can boost individual brand sales. An important aspect of the strategy is to aggregate personalized customer data and leverage its data analytics capabilities to create targeted promotions and style suggestions and then combine direct- to-consumer (DTC) and wholesale channels to capture what it terms greater “closet share,” in order to drive customer growth and stickiness, and to build revenue. DBGI believes that as revenue increases, its platform can scale, and also expects to achieve operating leverage and boost margin expansion via cost control measures.

Recent acquisition of Sundry brand expected to accelerate growth

DBGI has grown its brands portfolio via several strategic M&A transactions. Among the most recent, the company purchased Bailey 44 in February 2020, the Stateside brand in August 2021, and the Sundry label in December 2022. The addition of Sundry women’s clothing to the portfolio – including dresses, shirts, sweaters, skirts, shorts, athleisure bottoms and other accessories – is expected to accelerate overall growth. The transaction had been delayed during the pandemic; it closed at year-end 2022 and is one factor that prompted management to issue strong revenue and cash flow guidance for 2023 (see below).

Many of DBGI’s products are produced domestically. For instance, many Sundry products are produced primarily in Los Angeles. The Stateside brand is designed and produced in Los Angeles, as well. For production of other brands, DBGI relies on third-party contract manufacturers operating primarily in Europe, the U.S. and Asia Pacific region and its merchandise is then stored primarily at DBGI’s Los Angeles corporate warehouse and distribution center, which handles all warehousing, fulfillment, outbound shipping and returns processing.

With Sundry, as with most of its brands, DBGI believes it can implement measures to improve efficiencies and enhance growth. The company expects to reposition Sundry and believes this will yield strong benefits from the wholesale channel. Overall, opportunities to grow the brand consist not only of cross-promoting it with other labels in the portfolio, but also updating and potentially expanding certain product lines. One example is the planned new product launch in the Sundry women’s athleisure category in 2024. Athleisure is among the largest and fastest growing product categories in womenswear. The growth of this category had been consistent over several years but became even more apparent during the pandemic, as consumers went into lockdown. According to Forbes, the popularity of the category was boosted “in 2021 as consumers continue[d] to spend time at home exercising and seeking comfort in trying times” and, as a result, “activewear and athleisure brands flourished more than ever.”

Other brands in the DBGI brand portfolio are also undergoing certain strategic changes. For instance, to drive increased volume through the wholesale and online channels, beginning in mid-2022, DBGI transitioned the Bailey Shop and Bailey 44 to an exclusively online brand. DBGI subsequently has restarted Bailey 44 wholesale and expects the benefit of this restart to positively impact 2023 results.

Company expects to benefit from combining online & selective physical footprint

DBGI believes that traditional channels such as online and department and specialty stores have lost competitiveness amid the growing number of brands vying for customers’ attention, particularly as retail continues to transition to online and digital distribution continues to capture greater wallet-share. Bricks-and-mortar store closures accelerated during Covid and DBGI expects this trend to continue. At the same time, the company’s view is that digital only brands also cannot compete successfully because the challenges and cost of customer acquisition, processing returns and marketing amid growing competition makes it difficult for them to scale to maintain profitable growth, particularly as customers that are acquired online tend to have low loyalty rates and high return rates, according to DBGI. DBGI also anticipates growing challenges for single-brands that rely primarily on department stores, as markdowns and costly returns continue to pressure gross margins.

Moreover, the company’s strategy to analyze customer data is expected to facilitate its ability to promote personalized style suggestions around the relevant brands in its growing portfolio so that DBGI can offer what it calls "Customized Content" for customers. A key challenge for most retailers, according to DBGI, is that customers generally do not wear one brand exclusively at any time, but rather combine brands when assembling an outfit; the tops, bottoms, shoes and accessories often come from several different labels. Thus, DBGI believes that it can benefit from owning multiple brands across complementary categories and by providing personalized styles to customers to cross-promote its brands.

Selectively growing physical footprint & leveraging multiple channels…

As illustrated above, the company’s current brand portfolio includes Bailey 44, DSTLD, Harper and Jones (H&J), Stateside, ACE Studios and the most recent addition, Sundry. The portfolio offers a variety of apparel products through direct-to-consumer and wholesale distribution channels and also leverages the company’s websites and proprietary H&J Showrooms. Specifically, DBGI products were distributed through 75+ doors at major department stores as of year-end 2022 and through boutique stores encompassing 350+ points of sale, as well as through multiple e-commerce multi-brand platforms.

The company intends to be strategic regarding any new store openings, as DBGI believes it has an opportunity to selectively introduce its brands and cross-promotional retail concept in certain physical locations through owned and operated (O&O) sites. The O&O focus will be primarily on smaller urban centers such as its home market of Austin, Texas and other cities with similar growth and demographic profiles. Moreover, the company also operates high-end men’s clothing showrooms for its H&J brand. These showrooms reach profitable sales levels within the first year of operation, according to management, and DBGI contemplates opening new H&J showrooms and also adding complementary products that would be synergistic for the H&J brand. Specifically, as DBGI builds out its H&J showroom footprint, management expects to incorporate a store in store concept to sell others menswear brands.

… while combining strategic ‘bricks’ with online ‘clicks’ and digital marketing…

The overall strategy is to combine a strategic physical footprint with digital marketing to acquire customers, increase brand awareness and control costs. Founded as a digital-first retailer, DBGI subsequently has expanded into select wholesale and direct retail venues in order to engage consumers through their preferred sales channel. As noted, the company sells its various brands through its proprietary websites and showrooms, as well as in select specialty stores and department stores. The company expects to expand its wholesale distribution network and believes its growing omnichannel presence will improve its ability to lower customer acquisition costs (CACs), maintain customers and drive margins by lowering inventory risk.

… Equals DBI’s ‘New Formula:’ Acquire Customers via Physical / Retain Customers via Digital

DBGI also believes that using wholesale channels reduces CACs and enhances reach, as people often prefer to shop in physical venues in order to determine the quality of the apparel a to ascertain that the clothing fits properly and looks good. By diversifying through relationships with online, wholesale and specialty retail sites, including increasing department store partnerships with Nordstrom and potentially others, DBGI believes it can grow each brand over the next 3–5 years. Moreover, by owning many brands, Digital Brands Group also leverages its fixed costs across multiple revenue streams to obtain operating efficiencies and scale.

Revenue growth; DBGI targets monthly internal free cash flow of $500k by October ‘23

Digital Brand Group recently announced its expectation that 1Q23 revenues will be roughly $5.0 million, which would represent a 46.5% year-over-year increase. Quarterly online revenue was negatively impacted in January and February, according to management, by lower online advertising spending as DBGI brought on a new marketing agency. The company noted, however, that April monthly e-commerce revenues doubled from the January level, as work with the new performance marketing agency began. The company also reiterated that 1Q23 results will reflect operating leverage due to the Sundry acquisition and that it expects to be FCF free cash flow positive in 3Q23.

DBGI recently reported 2022 financial results. Net revenues advanced 84.2% year-over-year to $14.0 million, up from $7.6 million in 2021. DBGI’s gross profit increased to $6.0 million compared to $1.9 million, while the adjusted gross margin was 42.6% compared to 24.6% in 2021. The net loss attributable to stockholders, including $16.1 million in impairment charges, was $38.0 million, or ($49.32) per share compared to a net loss of $32.4 million or ($424.15) per share.

Despite the strong annual revenue growth, revenue was down in 4Q22 compared to the prior year fourth quarter, coming in at $3.4 million versus $4.0 million in 4Q21 The company attributed this decline primarily to the impact of reduced promotional spending (down $420,000) as DBGI focused on the launch of the Bailey Shop and also reflected the absence of wholesale revenue from Bailey 44, which DBGI transitioned to online only in June 2022, as noted. The 2022 results also did not include Sundry, as that acquisition closed late in the fourth quarter. Management indicates that Sundry is making a significant contribution to consolidated results thus far in 2023.

Digital Brands provided initial 2023 revenue guidance of $45.0 million to $50.0 million and EBITDA guidance of $2.0 million to $3.0 million. Reflecting its strategy noted above, the company anticipates strong revenue growth and operating leverage and efficiencies through shared services. The 2023 guidance incorporates the integration of Sundry, as noted, and the Bailey Shop multi-brand website. Management believes the successful launch of its growth strategy was hampered by the pandemic in 2022, particularly as the acquisition of Sundry – which the company views as critical to its ability to gain scale and generate positive cash flow – was delayed. DBGI anticipates turning cash flow positive in October 2023 once MCA (merchant cash advance) weekly payments end. The company then expects that it will generate more than $490,000 in monthly cash flow that is expected to strengthen its cash balances, in part reflecting a recent factoring agreement that enables the company to factor its monthly wholesale orders instead of waiting for payments from retailers.

The goal of reaching positive cash flow and EBITDA will also be facilitated, the company expects, through the increased use of digital marketing. By increasing its digital promotional spending, leveraging social media and also leveraging brand influencer partnerships, DBGI believes that several of the brands in its portfolio will benefit from an omnichannel sales approach. Many of the brands have not used digital promotional activity aggressively in the past. The Stateside brand is an example; the brand’s prior owners minimized spending on developing online sales, according to management, and DBGI believes it has the opportunity to grow Stateside online revenue and that of its other brands dramatically with the new performance marketing agency noted above. Future growth initiatives for DBGI also might include international expansion and licensing opportunities in select categories to grow its reach and revenue, among other potential measures.

Management has experience growing early-stage companies

Chief Executive Officer (CEO)

Chief Executive Officer (CEO) John Hilburn Davis IV, “Hil” is a former equity research analyst who covered the retail sector at Thomas Weisel Partners, SunTrust Robinson Humphrey and Citadel Investment Group. He has served as the company’s CEO since March 2019, having joined DS LTD in March 2018 to overhaul its supply chain. Prior to that, Mr. Davis founded two companies, BeautyKind, where he served as CEO from October 2013 to January 2018, and J.Hilburn, where he was CEO from January 2007 to September 2013, growing it from the pre-revenue stage to $55 million in revenues in six years.

Chief Financial Officer (CFO)

Reid Yeoman, DBGI’s CFO, has held that position since October 2019. Prior to that, he had Fortune 500 company experience, including holding senior positions at Nike and Qualcomm. From November 2017 to September 2019, Mr. Yeoman was CFO/COO at Hurley, which is a standalone global brand within the Nike portfolio.

Risks

Among the risks DBGI faces is that of increased competition, as potential new players enter the bricks-and-mortar and / or online retailer channels and if other better-capitalized players increase their marketing efforts and brand extensions. The company also faces possible increased competition for purchasing new brands and the potential need to raise funds earlier than management currently anticipates if it does not reach its cash flow generation targets as early as management expects. Potential fund raising initiatives could be dilutive to current shareholders. Following a private placement in January 2023 when DBGI raised $5 million through the issuance of 1.2 million shares, Nasdaq notified DBGI that it was compliant with the requirements for continued listing. Nevertheless, the company might face de-listing risk again, depending on market and share price performance, among other risks.

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