Digital Brands Group, Inc. Q2 FY2024 Earnings Call

Greetings. Welcome to the Digital Brands Group Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, John McNamara of Investor Relations. You may begin.

Thank you. Good afternoon, everyone, and thank you for joining us on the Digital Brands Group 2024 second quarter earnings conference call and webcast. With us on the line from management this afternoon is Hil Davis, Chief Executive Officer. Hil will begin the call with an overview of the quarter, and then we will open up the line for questions. As usual, we would remind you that this call may contain forward-looking statements, as defined in Section 27A of the Securities Act of 1933 as amended. This may include statements regarding, among other things, the company's business strategy and growth strategy. Expressions that identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on the 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 in these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. With that, I will now turn the call over to Hil Davis. Go ahead, Hil.

Hi. Sorry about that. Can everyone hear me okay? All right. Sorry about that. Good afternoon, everyone, and welcome to our second quarter conference call. I think the first thing I want to highlight on today's call is that we paid off over $5 million in debt and other liabilities during the first half of the year, which is very significant, as you can imagine. This was driven by conversations with strategic partners as part of our strategic review. What they wanted to see us do was start to clean up the balance sheet, which we've done now. And that was an incredibly important attribute for them, especially as they look at potential opportunities with us. Also, I'd like to highlight that we continue to get offers for our NASDAQ shell that are between $3.5 million to $5 million in value plus a percentage of whatever company would be coming in, usually $10 million to $20 million. There’s value in our shell alone. So one of the things as part of the strategic review process was based on feedback from strategic partners, what was most critical for them to focus on and the debt cleanup, which we did, which was $5 million in debt and other liabilities was a big piece of that. As part of that too, just through our Sundry acquisition, focusing on those synergies, we've lowered our G&A expenses by $4.5 million during the first six months. We're going to continue to see those savings in the back half of the year. In our conversations with strategic partners, that has been incredibly well received. In the private markets, you get your costs down, then any incremental revenue really starts to flow through at a much higher level. So these were two of the big pieces. We knew the operating leverage would come as we talked about for a while. The big piece and change for us was really cleaning up the balance sheet, especially given this environment where the consumer is softer today. We've seen a ton of companies report, from Home Depot to even Walmart, that they've seen more $100,000-plus household income, across Levi's and other apparel companies. For us, we don't have as much exposure to the majors, but we do have one big major department store asking to bring on our brands, and another one that is increasing the number of doors we're in. We're seeing success in the wholesale market. What we've done is, we've shifted our direct-to-consumer marketing spend into paying off the debt and now we're starting to turn that back on and start to ramp up. We’re focused in this environment because there's no reason to lean into a soft consumer. You just want to manage through this, which we're doing. Despite that, we're still seeing a 2.6 to 2.9 ROAS. So what does that mean? For every dollar we spend, we're getting $2.60 to $2.90 back in revenue. Usually, when you get to about 2x ROAS, that's when you start to become breakeven. That shows how much room we have now to lean in and spend on marketing, especially since we focused the first half of the year on the cleanup. Now we're starting to move into the growth phase again. As we said, we're doing a strategic review due to conversations we've had. This was one of the critical things they wanted to hear and it's been a big part of our strategy. Now that we've turned digital marketing back on, we're seeing a launch and incredible sell-through. We had a call with one of our majors two weeks ago, and we are in their top five for sell-through. They're increasing the number of doors. They're taking products to all doors. We have another big major that wants to add us, which we are in talks with to figure that out and onboard them as well sometime. We are excited about how the product is selling. It was a deliberate decision in the first half of this year to focus on the balance sheet cleanup rather than growth based on those conversations. Now that we're through that, we are now focusing on growth, especially on the DTC side while maintaining our success on the wholesale front. We tested a concept with DSTLD called 'Build Your Own Bundle' which has been incredibly successful without any digital advertising. We saw 150% growth in that brand by implementing 'Build Your Own Bundle'. We realized significant opportunity in the women's category to build a similar concept. We're launching this soon, and our current infrastructure allows us to minimize incremental costs. The fabrics we are using come from the Sundry acquisition, which doesn’t sell on wholesale anymore, leading to zero costs on that fabric while maintaining high quality. The women’s T-shirt will offer excellent value at Nordstrom's quality. So, our goal is to continue driving growth while maintaining balance sheet health. Now, let's discuss the numbers. Net revenues were $3.4 million compared to $4.5 million a year ago, which was peak Sundry sales before we had to absorb them and the brand was slightly declining. The next two comparisons will be easier this year. Importantly, we’ve doubled the units sold. The net revenues were negatively impacted by no digital advertising spend. If we had spent $1 million during the quarter at a 2.6 to 2.9 ROAS, we could have generated an additional $2.6 million to $2.9 million in revenue. If we spent that $1 million, we'd expect ROAS to drop to 2x to 2.5 times, showing how quickly we can accelerate revenue again when we shift from debt reduction to growth. We've paid off over $5 million of debt in the first half of 2024. Gross profit margins were 45.9% compared to 52% a year ago, primarily linked to very little digital revenue this quarter. Digital gross profit margins are around 75% to 80%. Gross profit dollars were $1.6 million compared to $2.3 million. G&A expenses decreased by $1.1 million to $2.9 million compared to $4.1 million a year ago. G&A includes $1.8 million in non-cash expenses mainly from depreciation and amortization. More than half of that will roll off in the first quarter as the amortization of the Stateside acquisition will go to zero. Sales and marketing expenses were lower than last year at $615,000 versus $1.1 million, due to no digital advertising. It was 18.1% compared to 24.4% a year ago, and we will start to ramp that back up after cleaning the balance sheet. The net loss was $3.5 million compared to a net loss of $5.7 million a year ago, which excluded a one-time cash benefit of $10.7 million last year. Including this benefit, net income would have been $5 million a year ago versus a loss of $3.5 million. Loss per diluted share was $2.08 compared to net income per diluted share of $0.31 a year ago but do keep in mind this included a $10.7 million benefit from one-time non-cash gains in the quarter. In closing, the first half focused on cleaning up the balance sheet, especially in the second quarter due to the soft consumer environment. As we move into the second half of the year, especially after the elections and anticipated rate cuts, we'll dial back up on our growth marketing, considering our ROAS of 2.6 to 2.9. The wholesale sector continues to perform well, and we are launching another licensed brand, Sunnyside by Sundry, contributing additional revenue. Our new brand, launching soon, offers significant growth potential with marginal costs. We shifted our focus to balance sheet cleanup, and are now ready to enter a growth phase given the positive ROAS results.

Thank you. At this time, we will be conducting a question-and-answer session. The first question comes from Richard Malinski, Private Investor. Please proceed.

Hi. How are you? I'm a recent shareholder of the company. My cost basis is around probably $1.50, $1.60. I was curious to find out how you paid off the $5 million in debt? Was that cash on the balance sheet? Was there an equity line on that? Just curious first how that was paid off.

Yeah. It's a combination of two things primarily: working capital from the business, which we continue to use to pay that down, and then we also did a warrant exchange in May. We used a portion of that as well, which was approximately $2.8 million after all fees and expenses.

My biggest concern is also when you look at the balance sheet, you see the current assets over current liabilities. I like the business that you have and I think what you're saying in the second half could be very exciting for me as a shareholder. But my biggest concern is, are you going to be okay with the capital that you currently have? Or have you publicly disclosed that you're looking to raise more money in the second half of this year to have that growth? Do you have enough at this point?

Yeah. We're taking it week by week. We’re looking at everything that's going on and what makes sense. The warrant exchange came out of just kind of an offer out of nowhere and it gave us an opportunity to clean up some stuff. We’ll be proactive where it makes sense. We are looking at the valuations getting credit for our success especially in private markets; private valuations tend to be more positive than public.

No, I understand that. But at the end of the day, they do see the last quarter was off. We're still losing money. My biggest concern is that can you go the next six months and prove to Wall Street that, look, what you're discussing publicly can happen, and see a nice ramp-up? Do you have that capital? If we didn't have to raise money, do you have enough at this point because you did get that warrant money?

Yeah. We can continue at this pace. The question is what makes the most sense for the business. We’re always in talks with private investors and looking at different options like debt, convertible debt, or raising capital as fluid and we're reviewing it all.

The last thing I'll just mention is that if you do a raise, it's always good to see insiders participate in the raise, and I'm always interested in that when you see insiders participating.

Yeah. The issue is because we are in these strategic discussions, we're privy to material non-public information. That prevents us from doing anything. We get offers once a week for a reverse merger, and the shell is worth a lot in this market.

Here's the good news on your part. Because there are not many shares outstanding, a recent company with a similar situation went from under $2 a share to over $20 in just a couple of days after a good announcement. I'm looking forward to seeing you execute the plan that you discussed.

Right. We're not making decisions solely based on the float. We think we have a growth strategy, and we're close to being cash flow breakeven with only a slight increase needed in revenue. We are going to focus on executing the business.

Thank you, and good luck.

Thanks.

Thank you. At this time, we have reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.