Digital Brands Group, Inc. Q1 FY2023 Earnings Call

Hello, and welcome to the Digital Brands Group, Inc. Q1 2023 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to John McNamara, Investor Relations. Please go ahead, John.

Thank you. Good morning, everyone, and welcome to the Digital Brands Group 2023 first quarter conference call and webcast. With us on the call this morning is Hil Davis, Chief Executive Officer of Digital Brands. Before we begin, we would remind everyone that certain matters discussed during today's call or answers that may be provided to questions may constitute forward-looking statements as defined under Federal securities laws. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the Company's quarterly report on Form 10-Q filed with the SEC. Copies of these documents are available on the SEC's website as well as on the company's website. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law. With that, I'd like to now turn the call over to Hil Davis, CEO. Go ahead, Hil.

Thank you, John. As mentioned during our fourth quarter and fiscal year 2022 conference call in mid-April, we saw significant operating leverage from acquiring Sundry. Our operating loss would have been only $250,000 when excluding non-cash expenses and about $250,000 in Sundry expenses that are no longer incurred since we completed the integration in late March. As indicated in our release, we have experienced operating leverage across all line items and anticipate further expense reductions moving forward. It's important to note that our e-commerce revenue for January and February was just half of our March e-commerce revenue, as we shifted to a performance marketing agency. Our e-commerce revenue boasts a high gross margin and requires minimal additional operating expense, resulting in a high flow-through. This is why we are optimistic for the fall, with: (1) e-commerce fully operational; (2) higher-priced items such as leathers, sweaters, and outerwear; (3) Bailey 44 generating revenue from the wholesale channel again; and (4) a complete product assortment instead of limited and mismatched inventory sizes. We expect to reach EBITDA positivity this fall, which is only three months away. Additionally, we are excited about launching two new revenue channels this fall. The first is our proprietary affiliate program, with a group of influencers and affiliates set for a soft launch in August. We believe this is a highly scalable channel based on my previous experiences and the positive feedback we have received. The second is our multi-brand retail store strategy. Given the success of existing DTC brands with their own retail stores and our successful multi-brand website, we believe we can establish over 50 stores in Tier 1 locations. Our peers in these areas have seen revenues between $2 million to $4 million per store and are profitable at that level. This projection is based on the potential revenue of 50 stores generating $2 million to $4 million each. We plan to utilize our free cash flow this fall to accelerate store growth, expecting to add over 5 stores annually for the next few years and to increase that pace thereafter. We believe these channels will boost our e-commerce and wholesale revenue by enhancing brand awareness and customer acquisition. Furthermore, we are set to launch our membership program in the second half of June, which will foster customer retention and repeat purchases. We are also developing e-commerce-only monthly drops similar to the sneaker business, exclusive to members and offered at special pricing without wholesale markups, providing strong value to customers. Our first quarter exemplified the operating leverage we can achieve and demonstrates a clear path to profitability. Now, let's go over the first quarter results. For Q1 2023, net revenues rose by 48.4% to $5.1 million compared to $3.4 million a year prior. Please note that we didn't fully benefit from e-commerce revenue in January and February due to reduced advertising spending during our transition to a performance marketing agency. Our gross margin profit for Q1 2023 surged 113.9% to $2.4 million from $1.1 million last year. The gross profit margin significantly increased to 47.9% from 33.2% a year ago. General and administrative expenses, including non-cash items, went up by 8.4% to $4.6 million from $4.3 million last year, with G&A as a percentage of revenue falling to 91% from 124.6% year on year. Notably, G&A expenses included non-cash items of $3.1 million compared to $1.8 million last year. Excluding these non-cash items, G&A would have been $1.6 million compared to $2.5 million last year, representing a decline in percentage of revenues to 30.4% from 72.6% a year ago. Sales and marketing expenses increased by 7.2% to $1.1 million from $1 million last year, reflecting a 7.2% rise in sales and marketing next to a 48.4% increase in total revenue. The sales and marketing expense ratio stood at 21.9% compared to 30.3% last year. Our loss from operations decreased to $3.6 million from $5.6 million last year. Excluding the non-cash items and G&A expenses, the loss from operations fell to $500,000 from $3.8 million last year. Excluding those non-cash items and G&A expenses, the loss from operations was $500,000 compared to a loss of $3.8 million last year. Please note, these losses accounted for about $250,000 in expenses related to the integration and timing of the Sundry transition, which we will no longer incur as the integration into our Vernon facility is complete and Sundry's headcount is lower than it was at acquisition. The net loss for common stockholders was $6.2 million, equating to a loss of $1.08 per diluted share, compared to a net loss of $7.8 million or $59.18 per diluted share last year. Excluding non-cash items from G&A and other income, the net loss would have been $2.4 million or a loss of 42 cents per diluted share, compared to a net loss of $6.1 million or a loss of 40.6 cents per diluted share a year ago. Our first quarter 2023 financial details can be found in the company's Form 10-Q for the three months ended March 31, 2023. In summary, as we've stated since going public, incorporating Sundry into our portfolio represents a significant turning point in our ability to rapidly increase revenue through new e-commerce channels and generate positive EBITDA and cash flow. This foundational transition was evident in the first quarter results and marks our initial benefit and proof of concept from the Sundry acquisition. We anticipate continued acceleration of this turning point and benefits as we approach the fall. We are looking forward to the projected monthly free cash flow we expect to generate this fall, linked to positive EBITDA and the conclusion of our MCA payments in early October. We anticipate generating over $500,000 in monthly free cash flow after our final MCA payment in early October. We will leverage this free cash flow to further our growth channels that yield strong returns and may consider share buybacks if they offer the best use of capital. We should have sufficient cash flow to pursue both our accelerated growth strategy and a potential share buyback program, which would provide the best returns to shareholders at these levels. Thank you all for your time, and now let's open up the floor for questions.

Hil Davis: Yes. Well, thanks, everyone, for attending the call. And I think the key thing here is we talked about the Sundry acquisition being the tipping point. I think the first quarter results prove that. I think what's most exciting as we look forward, not only do we have our current growth drivers, we've got the affiliate program, we've got store growth, we've got significant cash flow, and we'll use that to not only accelerate that; but as we said, at these levels to buy back shares and drive shareholder return. I appreciate everyone's time, and have a good day. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.