Digital Brands Group, Inc. (DBGI) Q2 2023 Earnings Call Transcript

Digital Brands Group, Inc. (NASDAQ:DBGI) Q2 2023 Results Conference Call August 17, 2023 10:30 AM ET

Company Participants

John McNamara - IR

Hil Davis - CEO

Operator

Greetings, and welcome to Digital Brand Group Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John McNamara. Thank you. You may begin.

John McNamara

Thank you. Good morning, everybody, and welcome again to the Digital Brands Group Second Quarter 2023 Earnings Conference Call and Webcast. With us on the call this morning is Hil Davis, Chief Executive Officer of Digital Brands. Hil will begin the call with a brief overview of the quarter, and then we'll open up the line for questions.

This 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 forward-looking statements speak only as of the date 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 and contemplated by or underlying 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. Company will be hosting a Q&A session at the conclusion as I mentioned.

And with that, I will turn the call over to Hil Davis. Go ahead, Hil.

Hil Davis

Yes. Thanks, John, and good morning, everyone. As we stated during our fourth quarter and fiscal year 2022 conference call, which was in mid-April, we would experience meaningful revenue growth and significant operating leverage with the acquisition of Sundry, which was completed December of 30th last year. As you can see from our second quarter results, we did experience significant revenue growth, and we also experienced operating leverage on every line item.

In fact, based on our current wholesale bookings and our current e-commerce trends, our third quarter and fourth quarter revenues will be meaningfully higher than this quarter. Again, we have visibility into our wholesale bookings. These are orders that we're already shipping and at our place. And based on that, our revenues for the third and fourth quarter will be meaningfully higher than this quarter.

Additionally, we will continue to show a higher level of cost savings in our third and fourth quarters as well versus this quarter, driven by combination of layoffs and redundancies that no longer have severance attached to them or just natural league as people left after we acquired Sundry. So we are only in the first inning of this structural shift in our business.

As I stated earlier, we already know what wholesale bookings are for our third and fourth quarters, and we're already selling spring now and getting very strong feedback. In addition to that, we have the additional cost synergies we will experience and then you layer on our e-commerce trends, and it is very exciting to see how this is playing out. And none of the above that I just mentioned includes the benefits from our 2 new revenue channels that we will launch this fall, which are: one, our proprietary affiliate program; and two our multi-brand retail store.

In fact, we've had to place a limit on the number of reps in the affiliate program and are now already building a waiting list. Keep in mind, I was able to double the revenue for J. Hilburn every year using this affiliate program, which took revenues from 0 to $55 million in 6 years. So as you can imagine, we are extremely excited about the virality and reach of this program, given that we are already on a waitlist.

Additionally, we are back in the wholesale market with Bailey 44, and we've added several new reps that are showing the product for spring deliveries and are already receiving wholesale orders. We had no benefit from wholesale last year from Bailey 44. We also will receive our first license income check for Bailey 44 next week, which throws directly to the bottom line at almost 100%, and we are in discussions regarding another license deal with 1 of our other brands.

As you can see, the second quarter improved for the revenue growth and the operating leverage we are achieving post to Sundry acquisition. And as a reminder, we will generate internal free cash flow on a weekly basis in October, all this will be incredibly transformative to us.

So let's dive into the second quarter results. Net revenue increased 69.6% in the second quarter of 2023 to $4.5 million compared to $2.6 million a year ago. Please note that these results exclude the revenue from our disposition of Harper & Jones for both the second quarter in 2022 and in 2023. Gross margins for the second quarter of 2023 increased 40.4% to $2.2 million compared to $1.5 million a year ago. Our gross profit margins increased significantly to 52% from 42% a year ago, and we expect to continue to see an increase in our gross margin, especially as our e-commerce trends continue to accelerate.

G&A expenses, including noncash items, decreased 4% to $4.1 million compared to $4.2 million a year ago. So you've got 69.6% in revenue growth and a decrease in your G&A expense. That shows the leverage we're getting. G&A as a percent of revenue declined to 90.7% from 160.1% a year ago. Please note that our G&A and expenses include $1.3 million in noncash expenses tied to depreciation and amortization -- amortization of a loan discount and stock option expense.

Sales and marketing expenses decreased 20.1% to $1.1 million compared to $1.4 million a year ago. Again, revenues increased 69.6%, while our sales and marketing expenses decreased by $300,000. That's incredible leverage on this line item. Sales and marketing expense ratio was 50.9% compared to 89.3% a year ago. Income from operations was $9 million compared to a loss of $10.6 million a year ago.

Net income attributable to common stockholders was $5 million or $0.38 per diluted share compared to a loss of $9.5 million a year ago, were a loss of $26.47 per diluted share. Our second quarter 2023 financial details are included in the company's Form 10-Q for the 3 months ended June 30, 2023.

So in closing, we have stated since we went public, adding Sundry to the portfolio was our tipping point in terms of, one, our ability to scale revenue faster; two, reduce overhead and leverage fixed costs; and three, generate positive EBITDA and cash flow.

Our second quarter results reflect that we are in the first inning of the tipping point. In fact, we will experience additional cost savings and synergies in our third and fourth quarter results as well as higher revenue base -- higher revenue in our third and fourth quarter just based on our wholesale bookings alone. None of the forecasts include the revenue growth, operating leverage and cash flow that the affiliate program will add in the fourth quarter and every quarter after that.

In addition, we'll have the multi-brand retail stores and the Bailey 44 licensing income, which we are now receiving, our first check is next week. In summary, you have, one, accelerating organic revenue growth; two, new revenue channels launching in the fourth quarter; three, declining operating expense due to synergies; four, licensing income; and five, internal free cash flow in the fourth quarter.

I think it's fair to say that we have turned the corner and are extremely excited about our near and long-term future. And with that, thanks, everyone, for their time. We look forward to our continued momentum, which we already know is coming and this concludes our second quarter 2023 earnings call.

We'll open it up to Q&A, please.

Question-and-Answer Session

Operator

Hil Davis

So thanks, everyone, for joining the call. We hope that everyone can see the significant shift in our business model and the momentum we're experiencing. And as I said, we already have a wholesale bookings for Q3 and Q4 booked, and we're already selling into Q1. And we already know the operating leverage we're going to continue to get. So we're very excited about how we're going to continue to execute against our vision that we laid out at the IPO and the acquisition of the Sundry in December 30th was the game changer we needed, and I think you're seeing it show up every quarter so far and we'll continue to do so.

So with that, thanks, everyone, for the time, and we look forward to talking on our next conference call.

Operator

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