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Digital Brands’ CEO on Q1: ‘Tale of Two Companies’ Pre- and Post-IPO

Digital Brands Group’s first quarter as a public company saw net sales decline 84 percent to $408,400 versus $2.6 million in the year-ago quarter, but CEO Hil Davis believes “we have put our worst quarter behind us” amid the funding secured via its $10 million IPO.

In a Nutshell: Digital Brands Group (DBG), which operates a stable of digitally native vertical brand including denim-centric DLSTD, high-end women’s wear brand Bailey 44, and custom and made-to-measure suiting company Harper & Jones (H&J), reported its earnings results just days after announcing it would launch a select group of brands on Amazon in Fall 2021.

This comes as DBG develops a marketing and advertising plan, including an Amazon marketing strategy, that will roll out starting in mid-July. The ultimate goal for the company is to have a fully interactive custom DBG store on Amazon with “exclusive content” in the near future.

The company cited Wells Fargo’s estimation that Amazon’s apparel and footwear sales in the U.S. grew by roughly 15 percent in 2020 to more than $41 billion, which is 20 percent to 25 percent above rival Walmart. One of DBG’s biggest focus areas for its brands has been channel expansion, bringing wholesale companies further into DTC and taking more direct players into retail partnerships.

“It is imperative to any brand to have a well-designed, high traffic presence on Amazon to add to brand recognition and promote sales both through the platform and on other channels the bottom line,” DBG’s Laura Dowling said in a statement. “Our data gives DBG great confidence we can hit above average conversion rates at a cost for customer acquisition compared to industry standards, we look forward to sharing the results of this project in the coming months.”

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DBG’s first quarter was mired with limited cash, limited inventory, minimal marketing spend and continued negative impacts from the Bailey 44 brand, as the Covid-19 pandemic delayed the start date of the brand’s new designer to the fall of 2020.

Davis, the founder of J. Hilburn, noted in an earnings call that despite the sales decline, DBG already has seen improved operating results in the second quarter, and expects significantly improved results in the third and fourth quarters this year.

“The design and release of new collections was delayed due to our lack of sufficient working capital. We plan on designing and releasing new collections now that we have sufficient funding after the IPO,” Davis said in the call.

As a result, DBG’s gross profit declined $1.6 million to a loss of $207,500 due to a liquidation of old and obsolescent Bailey 44 and DSTLD inventory at values below their production costs. Gross margin was in the negative at -50.8 percent, compared to a positive 52.5 percent in the year-ago period, largely due to the discounting and liquidation measures, said chief financial officer Reid Yeoman.

While the second quarter will see similar adverse impacts, Bailey 44 began shipping wholesale orders in May for the first time in fifteen months, bringing the women’s wear brand’s fall 2021 wholesale bookings back in-line with pre-pandemic revenue levels. Additionally, Harper and Jones’ contributions will be included in the second quarter numbers now that it is officially under the DBG umbrella.

The DSTLD brand is ramping up inventory initiatives as DBG scales the denim company, which received a new shipment of men’s denim inventory in May. In July, the brand expects to receive more men’s denim inventory, a new shipment of women’s denim inventory as well as a new men’s and women’s T-shirt shipment.

As of March 31, total inventory at Digital Brands Group was $573,496, well ahead of the $30,224 it had that time in 2020.

At the end of the quarter, DBG had $711,203 in cash and cash equivalents, up from $575,986 to close the fourth quarter of 2020.

Now, the company is still waiting to bring aboard its newest digitally native, elevated basics brand Stateside, which, if the acquisition is consummated, will be accretive to revenue and operating results.

Net Sales: Net sales across DBG brands were down 84 percent year over year to $408,405, versus $2.6 million in the year-ago quarter. The decline in net sales was driven by Covid-19 delaying the start date of its Bailey 44 brand launch until the fall of 2020, and limited inventory at DSTLD due to limited cash.

However, DBG could not include the revenue from Harper and Jones in its first-quarter earnings, as the acquisition was not finalized prior to March 31. For the first quarter of 2021, Harper and Jones generated $903,000 in revenue.

Net Earnings: Net loss attributable to common stockholders was approximately $3.0 million, or a $4.55 per diluted share loss. Losses continued to mount from the $1.9 million attributable to common stockholders in last year’s first quarter, or a $2.87 per diluted share loss.

Harper and Jones contributed $60,000 in EBITDA that wasn’t included in the report, Yeoman said.

CEO’s Take: “I cannot stress enough that the first quarter and to some extent the second quarter is really the tale of two companies—one pre-IPO with limited cash, inventory and marketing dollars and one post-IPO with a stronger cash position, fully stocked inventory and a meaningful marketing budget and strategy to drive revenue and earnings,” Davis said in the call. “Importantly, we expect the second quarter to be better than the first quarter, with the bulk of the post-IPO benefit coming in the third quarter and going forward as the inventory is 100 percent in stock, the marketing strategy is in full force and Bailey 44 wholesale shipments are back to pre-pandemic levels as we are booking October and November wholesale orders currently.”