You will be redirected back to your article in seconds
Skip to main content

How This New Acquisition Fits in Digital Brands Group’s Plans to Own ‘Closet Share’

As CEO of Digital Brands Group Inc. (DBG), Hil Davis is looking to reinvent the department store by cross-marketing a growing portfolio of apparel brands. And the company is about to get bigger, announcing on Tuesday it signed a letter of intent to acquire privately owned made-in-Los Angeles elevated basics brand Stateside.

Stateside is the newest addition to a stable that currently includes premium denim brand DSTLD, contemporary women’s wear brand Bailey 44 and recently acquired custom and made-to-measure suiting company Harper & Jones (H&J). The company also is prepping the Fall 2021 launch of luxury men’s wear brand Ace Studios after launching an initial public offering earlier this year.

According to Davis, both the wholesale and direct-to-consumer models are broken. Department stores have become less profitable as e-commerce takes a larger chunk of their business, disincentivizing brands from selling through those retailers. And DTC digital natives absorb excessive customer acquisition costs that often aren’t worth the low retention rates.

Unlike traditional fashion holding companies like VF Corp., PVH, LVMH, Capri Holdings and Tapestry, DBG’s brands operate on a shared back-end system leveraging customer data and purchase history to curate more personalized looks and styles for shopping across all the brands, all with the intent of assembling a shopper’s full outfit. The centralized data is the key to building a basket, thus lowering acquisition costs and improving retention that continue to plague e-commerce brands, Davis said at the Emerging Growth Conference.

Related Stories

“We think of the portfolio brands as a ‘closet share’ so when you walk out of your closet, you might be wearing six or seven items of clothing represented by five to seven brands,” Davis said. “Our goal is to be two or three of those brands.”

But don’t expect these to be the only brands at DBG for long—the company’s growth outlook relies heavily on acquisitions to make the “closet share” concept work. In fact, while the intent had been to go public, DBG filed for an IPO coming out of the Covid-19 pandemic since many of its prospective brands weren’t interested in being acquired by a private stock.

“We went public to have a currency to acquire these companies,” Davis said. “They either want public stock or cash. Going public allows us to pursue this acquisition engine.”

At the conference on May 26, Davis said DBG plans to  “show that we are an acquisition engine” in the next 30 to 45 days, heavily hinting that the Stateside acquisition, and potentially others, were in the immediate pipeline. Right now, the company is predominantly looking at leisure, men’s wear and women’s wear brands.

“One of our key pillars or beliefs is really that the day of the billion-dollar brand is done,” chief marketing officer Laura Dowling told Sourcing Journal. “We’re trying the small-and-medium-sized brands that have this intrinsic quality and a cult-like following. The idea would be to eventually break out into beauty and potentially furniture. There are other areas of the closet you call lifestyle, but for now, we’re really trying to home in on share of closet.”

DBG eyes brands that it can get to produce between $50 million and $150 million in revenue, and have a rabid fan base that can deliver lifetime value. Companies are also expected to reach a 50 percent contribution margin—revenue minus costs divided by revenue—after fulfillment and shipping costs.

The Stateside brand complements DBG’s closet share strategy and is consistent with the portfolio company’s required cash flow and profitability metrics, the company says. In fact, Stateside is expected to be accretive to DBG’s revenue in fiscal 2021.

Shared strategy leads to wider channel mix

On the back end, DBG is building out a single enterprise resource planning (ERP) system that will drive the customer data behind all the brands and enable stronger integration on the front end.

The integration here is important to the cross-marketing and merging of channels that DBG is striving for, particularly as the company increases its emphasis on email, SMS, retargeting and social media for personalized content that mixes and matches styles and looks.

Moise Emquies, CEO of the recently acquired Stateside brand, has faith in the company’s abilities: “Their direct-to-consumer and marketing expertise will allow us to focus even more on developing and expanding our product offering.”

As these content initiatives ramp up, DBG continues to push toward a more diverse channel mix. DSTLD, historically a DTC brand, recently started offering products through a wholesale channel in October 2020, with plans to grow wholesale to 15 to 20 percent of the business by 2022. The company plans to leverage Bailey 44’s relationship with select independent boutiques and select department stores to start getting its products in more wholesale doors.

Wholesale channels constitute 90 percent of sales for Bailey 44, which sells in more than 75 doors at major department stores and more than 350 boutique stores. But by year end, Davis said he expects wholesale to drop to 80 percent, with an ultimate goal to bring it down to 65 percent of sales in 2022.

“Most of the brands we’re in deep talks with tend to be about 70 percent wholesale, 30 percent DTC and these brands are set up to be 50 percent wholesale, 50 percent DTC next year in our opinion,” Davis said during the session.

H&J products are currently sold solely through direct-to-consumer, via three showrooms in Dallas, Houston and New Orleans. Like the other brands, this is expected to change with the launch of a ready-to-wear program this fall, with DBG anticipating wholesale to reach 20 percent of H&J sales.

As part of the cross-selling opportunity, DBG also sees an opportunity to sell other men’s wear products and brands in the H&J showrooms.

While DTC has become the darling of retail in recent years as more brands seek to take more of their operations in house at the expense of wholesale, Dowling highlighted the value in wholesale as a brand awareness driver, particularly for smaller brands that want to enlarge their footprint beyond the confines of an e-commerce site.

“Instead of looking at wholesale as, ‘We need to generate more margin points. We need to have a sale there,’ It’s less of a need,” Dowling said. “It’s more of a marketing channel of visibility for us. We’re going to get more of the margins back because we have the shared services on the back-end with the brand. When we’re looking at wholesale, yes, of course, we want to get sales, but it’s going to be less of a push of ‘We have to generate this amount of demand.’”

How Digital Brands Group Aims to Dominate Customers' Closet Share

Similar to the channel expansion it brings to its current brands, DBG now believes there is a “significant opportunity” to increase Stateside’s DTC channel, given that the brand primarily operates in wholesale, Dowling said in a statement. She also said the company believes it can increase Stateside’s brand awareness and customer reach to drive meaningful short and long-term revenue.

Opportunities exist to cross supply, but brand equity remains priority

Although the company is integrating the back-end services, it will take a more tapered approach to any integration related to the suppliers and manufacturers of the individual brands, which are operating primarily in Europe, the U.S., and the Asia-Pacific regions.

The company is reviewing the fabric mills and factories used by each brand to see if there are opportunities to consolidate or cross-use these mills and factories, which could drive increased volumes, lower production costs and increase gross margins. As an example, DBG plans to use DSTLD’s denim mills and factories to develop denim products for Bailey 44 and H&J. The company is also consolidating some production from China and the U.S. into a few factories in Europe.

“The goal really isn’t to take the factories and take that relationship away and outsource things into different places just because it’s cheaper. We still want the brand to stay intact, and we firmly believe in the quality of the products, and that’s what keeps consumers sticky,” Dowling said. “If there’s a fabric that one brand is using that we think would be good for another, of course, we’re going to propose that fabric, but it may not work for that brand. So when we can have shared services back there, or we can make changes, we do it. And if we can’t, we can’t, but we really don’t want to do it at the risk of diluting the brand.”

The company currently consolidates DSTLD and Bailey 44’s distribution within a single warehouse and distribution center in Vernon, Calif.

Heyday reels in $70 million in funding

Building a stable of brands isn’t exclusive to DBG, as more companies are taking their own individual approach to the concept. One of them, Heyday, is focusing its efforts on online marketplace sellers, recently closing on $70 million in Series B equity financing, less than six months after announcing a $175 million Series A.

Heyday partners with entrepreneurs to acquire, launch and incubate brands, and is developing a marketplace-native technology, data and operations stack in an effort to help the brands thrive. The platform also offers an entrepreneur equity-sharing program that its brands can participate in.

Heyday’s marketplace-native approach caters to modern consumer preferences of convenience, selection and value, which digital marketplaces like Amazon and eBay (both Heyday investors) have provided, the company says.

Since emerging from stealth in November 2020, Heyday says it has crossed $100 million in total revenue, grown its global team to over 100 employees and expanded into over a dozen international markets. Co-founders Sebastian Rymarz and Adam Gerchen expect Heyday to cross $200 million of annualized revenue by the end of 2021, and $1 billion by the end of 2023.

“Amazon developed the world’s largest entrepreneur-creation machine, with 50 percent of its sales made by entrepreneurs who are building brands that delight consumers every day. Our mission is to help those e-commerce entrepreneurs reach new heights,” said Rymarz in a statement. “A digital brand is worth more inside of Heyday than outside of Heyday.”

The company has hired Tapan Shah, formerly of Amazon, to serve as its head of technology, and Karan Gandhi, who worked at online wholesaler Boxed and Amazon, as head of operations. Brandless founder Tina Sharkey was also added to the board to provide strategic counsel, global brand and product innovation experience to the company.

General Catalyst led the round, tripling its original investment, with additional financing from existing investors including Khosla Ventures and Arbor Ventures, as well as Heyday’s entrepreneur partners.