Digital Brands Group, Inc. Q3 FY2024 Earnings Call

Greetings. Welcome to the Digital Brands Group Third Quarter 2024 Conference Call. At this time, all participants are in listen-only mode. Please note, this conference is being recorded. I will now turn the conference over to your host, John McNamara. You may begin.

Thank you. Good afternoon, everyone, and welcome again to the Digital Brands 2024 third quarter earnings conference call and webcast. With us on the line from management is Hil Davis, Chief Executive Officer, who will provide an overview of the quarter. At the end of the prepared remarks, Hil will respond to a few questions that were submitted prior to the conference call. As usual, we would remind you all 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 the company's business strategy and growth strategy. Expressions which 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 the company's 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.

Good afternoon, and thank you, John. As we stated in our press release, our third quarter was the last quarter we significantly focused on paying down debt and liabilities given the soft macro economy and the overhang of the election. Starting in October this year, we transitioned from cleaning up the balance sheet to focusing on increasing top line growth. As we stated in our press release yesterday, we partnered with VAYNERCOMMERCE to drive digital revenue. This partnership has already led to a 34% increase in daily digital revenues and a 7% increase in average order volume during the 17-day period, which was October 22 through November 7. This was prior to the 30 days they took over, which was September 22 to October 21. We believe these results reinforce the positive value of our partnership with VAYNERCOMMERCE. We intend to add the agency's email and SMS campaigns, which is text messaging campaign services starting this week. This partnership was the first step in a multi-step growth strategy, coupled with the launch of AVO. Other initiatives to this partnership, which we are in the process of launching or will launch are as follows: adding several apps to our Shopify platform that have increased conversion rates for their other brands they work with by over 20%; selling on other digital platforms such as Amazon and TikTok, which we plan to launch in Q1; launching influencer campaigns. This is a significant focus for us, partnering with influencers and leveraging different platforms. And with VaynerMedia's buyer side, there's a lot of excitement around this. Launching limited edition product capsules every month that are only available online in small quantities with exclusive pricing, fabrics, and design. This follows the sneaker industry regarding shoe drops. We plan to focus on that for all our brands in our DTC channel. Please note that we had none of these initiatives before, and going forward, we will have all of these. There are also other major initiatives in the works along with these noted above, which we will announce as we get closer to launching those. What I want everyone to really take away from this is Q3, you had probably one of the worst macro-economies, you had the election, and then you had us focusing on paying back debt and liabilities. This was intentional because it did not make sense based on our conversations with other companies to invest heavily in digital marketing. As everyone's noted, the wholesale and consumer markets have been soft. The company will also benefit from an increase of over $4.5 million in earnings in 2025 that is associated with amortized non-cash expenses, including Stateside's goodwill concluding at the end of this year, as well as $3.1 million in amortized interest expense, which will also end at this year. Therefore, next year, we will already see a benefit of $4.5 million in earnings associated with those two items. In addition to that, we took a meaningful wholesale price increase at Sundry, which has met no resistance, and that alone should add more than $500,000 a year to gross margins. We know it encountered no resistance because we have been selling wholesale for the spring market already. This reflects a major inflection point in our business as we have shifted from cleaning up the balance sheet into growth mode. Given that the majority of our cash was being used to pay down debt and liabilities, we could not invest properly in growth. Even if we had invested in growth, it would have been in a weak macro consumer market that is impacting all retailers from Home Depot to Levi's to lululemon to all the fast fashion brands, and even has impacted luxury brands. Any growth investment during the last nine months would have been met with a soft consumer market based on the publicly reported results of these brands. Now that the election is behind us and we feel that the consumer has stabilized and the balance sheet has been cleaned up, we feel now is the right time to make this transition into growth. Before we could do that, we needed the right digital partner and the cash flow to do this. We believe that we have found the right digital partner in VAYNERCOMMERCE, and we also have the cash flow to invest in growth. We are extremely excited to move into this transition and are already thrilled about the results we have seen thus far with only one piece of the growth initiative being rolled out with others starting this week and going forward. Now, let's discuss the third quarter results. Net revenues were $2.4 million, compared to $3.3 million a year ago. It's important to note that we decided to walk away from our largest wholesale account due to a single-digit gross margin before the required additional expenses to manage that account, which include making multiple samples because they wanted their own sizing. This meant that this account was net negative in cash contribution. While it added revenue, we lost money on it. Therefore, we will lose this revenue going forward, but we will increase our profitability. This was over $800,000 of the difference in the year-over-year difference. It's vital to understand that while it impacted revenue, it actually improved profitability and will continue to improve profitability as we move into next year. Net revenues were also negatively impacted by limited digital advertising spend, which resulted in low e-commerce revenue. As we have discussed, since adding VAYNERCOMMERCE, we've seen a significant increase in that digital revenue, and that's just with them A/B testing products right now with content that we had. We're reshooting much of that content with them next month, and they are accurately gauging what types of ads are working best. Therefore, we will optimize our content based on the ads performing best, and we just had a call about that today. Gross profit margins were 46% compared to 52.3% a year ago. The primary factor in this decline is the fixed cost associated with our gross margins, which includes the entire warehouse rent and all labor expenses associated with it, our pattern makers, sewers, and some design member experiences. It's essential to acknowledge that there are a lot of fixed costs in our gross profit margin; these will naturally lift as our revenue increases, which is very important to understand due to the fixed cost nature. Gross profit margins were negatively impacted by lower digital revenue associated with the limited digital advertising revenue in the quarter. Gross profit in dollars was $1.1 million compared to $1.7 million a year ago. G&A expenses decreased by $1.3 million to $2.4 million, compared to $3.7 million a year ago. That is a significant reduction year-over-year totaling $1.3 million. Also included in our G&A were $1.6 million in non-cash expenses, including goodwill expenses for the brands we've acquired, depreciation, and other similar items. G&A expenses also declined from the last quarter by over $500,000. We continue to see leverage on our cost savings and the intentional way we're managing expenses. Now that we're returning to growth mode, we're excited to see what will happen next. Sales and marketing expenses were $655,000 compared to $1.2 million a year ago. The sales and marketing expense ratio was 26.9%, compared to 35.3% a year ago. The majority of the sales and marketing expenses are attributed to the marketing team. As we have stated, we have now outsourced our sales and marketing team to VAYNERCOMMERCE, so you will see this cost decrease and be supplemented with increased digital dollars going forward. The net loss was $3.5 million compared to a net loss of $5.4 million a year ago. This includes a $1.6 million loss in non-cash expenses. Despite our revenues being lower, our net loss was significantly reduced, largely attributed to the fact that the wholesale account was highly negative. Starting in Q1 next year, our interest expense will decline to $105,000 from over $700,000 a quarter due to the completion of the amortization of the interest expense debt at year-end. This represents an annual benefit of $3.1 million that will positively impact net earnings in fiscal 2025. The net loss per diluted share was $1.63 compared to a net loss of $14.55 a year ago, a significant increase. In closing, I want to emphasize that we're truly excited about this transition we are making from having to focus on cleaning up the balance sheet and navigating a challenging macro market into a phase of growth. We have a strong partnership with VAYNERCOMMERCE and are already seeing better results. These results are only from the digital advertising channel and do not include our text messaging, email, influencer partnerships, or other initiatives we have yet to announce but are finalizing. Additionally, 2025 will see a $4.5 million earnings benefit compared to 2024. This is a significant lift for 2025's earnings before considering any benefits from the growth initiatives noted above. That concludes our third quarter 2024 conference call. As we stated, we paid back $1.3 million in that convertible debt. So the company has no convertible debt left on its balance sheet. The only debt that we have is longer-term debt. We have really cleared that overhang, which is important because that pressure is not there; it will allow us to focus on growth moving forward. Also, there was a question about the Vayner relationship and its development. We were initially cautious because we thought we were too small and didn't have enough going on to establish a partnership. We followed up with them recently, especially with the launch of AVO, and as they dug into what we're doing, they became excited. Initially, they believed they might not be right for us, but after further discussion, they recognized that partnering made a lot of sense, especially considering it's a heavily incentivized percentage of revenue deal. They're putting their money where their mouth is. Furthermore, on every call, we typically have about 15 people from their team involved. They are highly invested in us, which is crucial. I am really excited about what we can achieve because we have a performance marketing group that has worked with various brands and has scaled many of them, now fully focused on us. There's no way we could replicate this niche in terms of depth and breadth of knowledge on our own without significant investment. We're eager to create outstanding content starting in December and moving forward. Currently, we're only spending around $1,500 a day on this effort, and we're already seeing a meaningful lift. They are A/B testing the results to determine what works best. Based on the outcomes, we plan to shoot content in the first two weeks of December aimed at leveraging influencers heavily. We're enthusiastic about what this could bring. Additionally, I want to reiterate that the revenue decline in Q2 was driven by a wholesale brand that was net negative for us in terms of operating margin. This wholesale account had a gross margin of only about 7% and was net negative on the operating margin. While revenue was impacted negatively, gross margins will improve significantly along with the price increase at Sundry. We are also receiving interest from several major retailers, and we're in discussions to add Sundry and Stateside as well. This opportunity was another reason we decided to terminate our previous wholesale partnership. So that concludes the quarterly conference call. I appreciate everyone's time, and I hope everyone has a nice day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.