Digital Brands Group, Inc. Q2 FY2021 Earnings Call

Greetings, and welcome to the Digital Brands Group Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hil Davis. Thank you, Hil. You may begin.

Great, thank you. Good day, and welcome to the Digital Brands Group second-quarter fiscal year 2021 earnings conference call and webcast. All participants will be in a listen-only mode. We will have a question-and-answer session at the end of the script. This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding among other things, the company's business strategy and growth strategy. Expressions which identify as forward-looking statements speak only as of the date the statement is made. 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 our control. Future developments and actual results could differ materially from those set forth and contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurances that the forward-looking information will prove to be accurate. Accompanying today's call will be just a Q&A, and the company will be hosting that at the end of this and the conclusion of prepared remarks. Should you have any questions, and you'd like to submit, please email us or chime in. On the conference call, Hil Davis, the Chief Executive Officer; and Laura Dowling, our CMO; our CFO, Reid Yeoman was not able to join this call due to some health issues. I'm going to go ahead and read into the second quarter results. So I want to start with, our second quarter of 2021 reflects a meaningful improvement in our business results from our first quarter results as we were able to benefit from the cash inflows from our IPO in the middle of May. These improving business trends have continued into the third quarter, and we expect them to improve throughout the third and fourth quarters of 2021 now that we have sufficient cash and inventory to support expected levels of operations. I want to repeat that, our improving business trends have continued into the third quarter, and we expect them only to improve throughout the third quarter and into the fourth quarter. As we stated in our first-quarter 2021 earnings release, a combination of factors negatively impacted our pre-IPO results, which included: one, limited cash; two, limited inventory; three, minimal marketing spend; and four, the continued effects of COVID-19's impact on Bailey 44. We are experiencing improving results every month as we move past our IPO date which was in May, as we are able to use the IPO cash proceeds to order inventory, spend on marketing, and invest in our brands. Since our IPO this past May, which posted on our balance sheet with cash for working capital, we have been able to ship inventory for DSTLD, which is contributing to our improved results of July and August. We shipped Bailey 44 products to wholesale accounts starting in mid-May with a significant acceleration in wholesale booking orders for this fall that are in line with pre-pandemic wholesale levels. And most importantly, we're continuing to see this trend as we sell in the wholesale for January and February. We are also able to develop a marketing and advertising plan including an Amazon marketing strategy which we are rolling out starting mid-July, with the majority of the spend starting this fall. So those are three significant drivers that we just saw the very beginning of, in Q2, and we will see in full effect starting in September. Inventory, Bailey continues to succeed and grow and we're seeing that as our wholesale bookings for January and February increase. And finally, the development of the marketing plan and advertising plan, will roll out as the inventory continues to land in September for fall. As we discussed in our S-1, we are an acquisition-oriented company, and we expect to acquire more companies this year, most of which will require GAAP PCAOB audits. These audits take time, and one of the reasons these audits take time is because you have to do a sub-period as part of that, which ends in June for most of these companies. You also have to do an inventory rollback because most of these companies did not do an inventory hand count at the end of their fiscal year. So we are now in the first part of August, we have to again look at a June end of June rollback and also the end of June sub-period. So if you kind of take that math and then expand it, you can see why if we have acquisitions, which we are an acquisition engine, they will happen as we move forward, because of that timing of having to do the sub-period plus the inventory rollback. So we're excited about our ability to make these acquisitions and being in audits currently. Once again, I cannot stress this enough. This is really a 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. We believe that our second quarter results, which only benefited from six weeks of the IPO cash proceeds, reflect this. It also only benefited from six weeks of the Harper & Jones acquisition, and their strongest month was March. I mean it's March and April, which could not fall into our earnings numbers. We expect the bulk of the post-IPO benefits to come in the third and fourth quarter as inventory is 100% in stock, the marketing strategy is in full force, and Bailey-44 wholesale shipments continue to trend at pre-pandemic levels. So getting into the numbers. Revenue increased 51% year-over-year to $1.0 million versus $664,000 in the corresponding fiscal period of 2020. This represented a $340,000 increase in revenues. The increase in net sales is driven by the increase in revenue of Bailey-44 and the additional Harper & Jones on a pro-rata basis. We benefited about six weeks of Harper & Jones, which is a little less than half the quarter. Additionally, revenues increased 145% sequentially from our first quarter as we benefited from cash to fund inventory. Bailey-44 post-COVID revenue ramped up alongside approximately six weeks of Harper & Jones revenues as the acquisition did not close until the IPO date. Since our IPO, we have seen an acceleration in Bailey-44 revenue as we were able to design and ship new products. Additionally, since our IPO, we are back in stock in DSTLD's core denim and tees for men's and women's products, and we expect to have inventory for seasonal fall products this year, as our team just left Turkey last week, and we were able to confirm all shipping dates in September. We are very excited about the product that will be available soon. To give you some perspective, last year we did not have fall product for DSTLD, so you can see the difference we will have year-over-year. No fall product last year means we will have fall product this year for DSTLD. Additionally, we are releasing pre-pandemic inventory from the Bailey, Harper & Jones acquisition. We are really looking forward to how our third quarter is developing. Our gross profit margin increased to 79.7%, or $663,000 for the three months ended June 30, 2021, up from $395,000 compared to the negative $268,000 for the same period in 2020. The increase in gross margin was primarily attributable to better gross margins across all of our brands. Our gross margin increased 80% year-over-year to 39.3% from a negative 40.4%, which resulted in an increase of $663,000 across all of our brands. Additionally, our gross margin increased 90% sequentially from our first quarter. Our gross margin was 39.3% for the second quarter compared to a negative 50.8% for the first quarter. We expect gross margins at Bailey-44 to increase significantly in the third and fourth quarters as approximately 65% of Bailey-44 revenues in the second quarter were off-price revenue from older products, which has little to no gross margin. Let me repeat that. We expect gross margins at Bailey-44 to increase significantly in the third and fourth quarters as approximately 65% of Bailey-44 revenues in the second quarter were off-price revenues from older products, which has little to no gross margins. Additionally, we expect DSTLD's gross margin to increase meaningfully in the third and fourth quarters as the second quarter was impacted by an inventory adjustment from the first quarter. So both brands should continue to exceed increasing gross margins. Our operating expense increased by $9.6 million for the three months ended June 30, 2021, to $11.2 million, compared to $1.6 million for the corresponding fiscal period in 2020. The increase in operating expenses was primarily due to non-cash charges incurred in 2021 upon the IPO and acquisition of Harper & Jones, including stock-based compensation expense of $3.6 million and a change in fair value contingent consideration of $3.1 million, as well as increased professional fees and Investor Relations costs. The total of these one-time expenses was $7.3 million. The non-contingent expense is related to our Bailey acquisition, relative to the one-year guarantee post IPO. And we expect that to trend as our market cap trends, but that is just an accounting markup, it's a non-cash expense. Our other expenses increased by $0.6 million to $1 million in the three months ended June 30, 2021, compared to $0.4 million in the corresponding fiscal period in 2020. The increase in other expense was primarily due to interest expense from the April 2021 note, which was fully amortized during the second quarter of 2021. Our net loss increased by $8.4 million to a loss of $10.7 million for the three months ended March 31, 2021, compared to a loss of $2.3 million for the corresponding fiscal period in 2020, primarily due to the non-cash expense associated with stock-based compensation expense of $3.9 million and a non-cash expense associated with a change in the fair value of contingent liabilities of $3.1 million. These two non-cash expenses represented $7 million of the $8.4 million increase. In addition to our second quarter results, we wish to make you aware of the following. Third quarter operating results will experience similar although less significant adverse impacts from the factors that impacted Q1 and Q2, and most of that has occurred in the quarter that's part of the quarter that's passed. As we stated, we got back from Turkey two weeks ago, fall products are on time for September, we're excited about what that's going to bring. And we've got the cash to increase marketing spend versus no marketing spend in the third quarter of last year for any of our brands. 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. We believe that our second quarter results, which only benefited from six weeks of the IPO cash proceeds reflect this. We expect the bulk of the post-IPO benefits to come in the third and fourth quarters as inventory is 100% in stock, we have fall inventory, the marketing strategy is in full force, and the Bailey-44 wholesale shipments are back to pre-pandemic levels, and Harper & Jones is fully integrated into the business. We look forward to driving short and long-term shareholder value as we move to the third and fourth quarters of 2021. We are excited to have completed our IPO in May, and we now have the cash and working capital to execute our growth plans that are driven by both organic revenue and earnings growth and will be driven by accretive acquisitions. As you can see, we've already had one acquisition and we plan to make additional acquisitions this fiscal year based on the non-binding LOI we released about Stateside. Again, these acquisitions require a PCAOB GAAP audit that requires a sub-period in this particular case, to the end of June, and an inventory rollback. Those do take time, but we are in early August. And so we're excited about our acquisition growth strategy and what it can bring to the company. I think the inclusion of Harper & Jones, even just for the six weeks, shows you the impact that our acquisitions can have from an accretive nature. Several of our second half of the year drivers are already in effect, such as October and November wholesale bookings for Bailey and we're seeing that flow through into January and February. So again, the wholesale calendar is a little bit extended. We're already selling January and February, and the results have been incredibly strong. We're excited about that growth that we're seeing not only through the fall but also now into January and February for Bailey. We are back in stock on the DSTLD core products, and fall products are landing in September. We have a first Ready-to-Wear program for Harper & Jones this fall that commences in October. That brand has never had Ready-to-Wear, and the clothiers that sell Harper & Jones are super excited. We just finished our first photo shoot there, and they're already starting to show their clients and the response has been incredibly positive. We're excited about what that can bring to revenue and Harper & Jones' growth and earnings. Finally, we're going to be launching our marketing strategy this fall. We have not had the ability to pursue marketing for over eight years. We expect this to drive significant upside for all our brands in the second half of the year. As you can see, we have a lot of drivers as we move into the fall and throughout the year as we transition from our pre-IPO status to our post-IPO status. We're very excited about what this can bring and what we can do. This concludes our second quarter 2021 earnings call, and we'll open it up for questions.

Thank you very much. And just to, again, continue to talk about this, we're excited about where we are and where we're going. Bailey continues to trend at pre-pandemic levels even as we look into January and February wholesale bookings. DSTLD has confirmed that the products for fall will be landing in September and we are very excited about what that could bring. Harper & Jones will be fully integrated in our Q3 results, and we also have several drivers there including our Ready-to-Wear program, which we did not have last year. Finally, we're going to be able to drive meaningful marketing dollars, which we have not had in over a year. All those continue to make us excited about what we've seen, and the trends that we're experiencing currently both in Q2 and also into Q3 so far. And also, we're excited about our acquisition strategy, and getting through the PCAOB GAAP audits and continuing to add accretive acquisitions to the company for our S-1. With that, thank you all very much, and have a great day. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.