Digital Brands Group, Inc. Q4 FY2022 earnings call

Management Statement and Operational Highlights

• Sundry Acquisition Importance: The Sundry acquisition is critical for achieving scale, positive EBITDA, and positive cash flow. It was delayed due to market conditions but closed in December 2022.
• Working Capital Cycle Transition: Transitioned from a negative to positive working capital cycle by factoring wholesale orders, allowing cash receipt at shipment and cash recycling. Sundry's 75% wholesale-driven revenue enhances this transition.
• Bailey Shop Strategy: Launched in October 2022, allowing reduction in advertising spend to focus on cross-merchandising. Sales and marketing expense ratio improved to 7% of sales. Data analytics firm engaged in February to drive advertising spend and optimize strategies.
• Bailey's Wholesale: Relaunched for fall 2023, with reduced styles per season to increase profitability. Signed a license deal with an off-price retailer for Bailey's brand, expected to contribute $500,000 to $1 million in free cash flow starting fall 2023.
• Margin and Expense Adjustments: G&A and COGS reclassifications impacted Q4 results, but operating leverage was observed with G&A expenses increasing $646,000 while revenue increased $6.4 million.

Segment Performance

• Fourth Quarter 2022: Net revenue decreased 15.8% compared to the previous year, from $3.4 million to $2.85 million (excluding Sundry contribution). Sales and marketing expenses decreased $420,000 to $1 million, with the ratio declining to 7% of sales from 18.5% a year ago. Net loss attributable to common stockholders was $15.8 million, or $20.46 per share. Excluding certain items, net loss was $3.1 million, or $4.06 per share.
• Full Year 2022: Net revenues increased 82.4% to $14 million compared to $7.6 million in 2021. Gross margin profit increased 218.5% to $6 million compared to $1.9 million in 2021, with gross margin rising from 24.6% to 42.6%. G&A expenses were $16.4 million, down $400,000 from 2021; sales and marketing expenses were $5 million, down from $3.8 million; distribution expenses were $612,000, up from $489,000. Net loss attributable to common stockholders was $38 million, or $49.32 per share.

Guidance

• Expect to achieve EBITDA positive in July or August 2023.
• MCA payment will be paid off in mid-October, contributing $490,000 monthly in free cash flow starting then.
• Data-driven e-commerce strategies are expected to drive revenue growth at lower customer acquisition costs and higher repeat rates.
• Significant operating leverage is anticipated with the acquisition of Sundry, especially in marketing and team consolidation.

Risks

• Market volatility that could impact acquisition timelines and financial performance.
• Uncertainty around the success of cross-merchandising strategies without sufficient data or market response.
• Dependence on the successful repayment of MCA and ability to sustain positive cash flow after MCA payoff.

Q: Any projections on percentage of increase of sales with the cross-branding or a percentage of possible revenue?

A: It's hard to specify exact percentages currently as it's brand-by-brand testing. Saw significant increases on Bailey Shop (100%-200%) and cross-merchandising between Stateside and Sundry led to 50% daily revenue increase on Sundry. Also exploring revenue share deals with third parties for cross-merchandising with no incremental cost.

Q: Update on going private?

A: Still evaluating. Valuations are low relative to expected free cash flow starting October. Options include acquisitions, store/catalog openings, share buybacks. Current market cap not reflective of fair value considering free cash flow from MCA payoff and other drivers.