Digital Brands Group, Inc.

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hill Davis. Thank you, Hill. You may begin.

Great. Thank you. Good day and welcome to the Digital Brands Group's second quarter fiscal year 2021 earnings conference call and webcast. All participations 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 identified 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 underlining 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 in 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, Hill Davis, the Chief Executive Officer, and Laura Dowling, our CFO, 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 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 were 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 bolstered our balance sheet with cash for working capital, we have been able to ship inventory for Distilled, which is contributing to our approved results in July and August. Ship Bailey 44 product to wholesale accounts starting in mid-May with a significant acceleration 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 into wholesale for January and February. Developing, and we're 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 September. So inventory, Bailey's continues to succeed and grow. And we're seeing that as our wholesale bookings for January and February. And finally the developing of the marketing plan and advertising plan, which will roll out as the inventory continues to land in September for fall. As we discussed in our S1, we are an acquisition-oriented company. We expect to acquire more companies this year, most of which will require GAAP PCAOB audits. So why does that matter? That matters because these audits take time. And one of the reasons these audits takes time is you have to do a stub 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 rollback 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 into june stub period so if you kind of take that math and then expand it you can see why we're going to if we have acquisitions which we are an acquisition engine will happen as we move forward because of that timing of having to do the stub 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 to tell the 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 and Jones acquisition and their strongest month was March. I mean, March and April, which did 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 a hundred percent 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 million versus $664,000 million in the corresponding fiscal period in 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 addition of Harper and Jones on a pro-rata basis. We benefited about six weeks of Harper and 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's 44 post-COVID revenue ramp, and approximately six weeks of Harper and Jones revenues as the acquisition did not close until the IPO date. Since our IPO, we have seen acceleration in Bailey's 44 revenue as we were able to design and ship new products. Additionally, since our IPO, we are back in stock in Distilled's core denim and tees for men's and women's products. And we expect to, and we know we'll have inventory for seasonal fall product this year, as our team just left Turkey last week, and we were able to confirm all shipping dates in September. And we're really excited about the product that will be landing then. And to give you all an idea, last year, we did not have fall product for Distilled. So you can take that and understand the laugh we're going to have year over year, no fall product last year, fall product this year for distilled, pre-pandemic inventory coming out for Bailey's, Harper and Jones acquisition. So we're really excited about how our Q3 is shaping up. Our gross margin, our gross profit margin increased 79.7% or 663%. for the three months into June 30th, 2021. It increased to 395,000 from a negative 268 for the corresponding fiscal period in 2020. The increase in gross margin was primarily attributable to better cross 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, again, 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's 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's 44 revenues in the second quarter were off-price revenues from older products, which has little to no gross margins. Additionally, we expect distilled gross margin to increase meaningfully in the third and fourth quarter 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 the three months into June 30th, 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 and 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 relation costs. The total of these one-time expenses was $7.3 million. The non-contingent expense is related to our Bailey's acquisition relative to the one-year guarantee post IPO. And we expect that to trend as our market cap trends. But that's just a accounting markup. It's a non-cash expense. Our other expenses increased by $0.6 million to $1 million in the three months into June 30, 2021, compared to $0.4 million in the corresponding fiscal period in 2020. The increase in the 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 non-cash expense associated with stock-based compensation expense of 3.9 million, and a non-cash expense associated with the 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 by the factors that impacted Q1 and Q2, and most of that has occurred in the quarter that's This part of the quarter that's passed. As we stated, we got back from Turkey two weeks ago. Ball products 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 benefit to come in the third and fourth quarter. 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 and 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 quarter 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 plan that is 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 can plan to make additional acquisitions this fiscal year based on the non-binding LOI we released about stateside. And again, these acquisitions require a PCAOB gap audit. That requires a stub 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. And I think the inclusion of Harper and Jones, even just for the six weeks, show you the impact that our acquisitions can have from an accretive nature. Several of our second half of the year drivers are already in fact, such as October and November wholesale bookings for Bailey's. 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, February, and the results have been incredibly strong. And we're excited about that growth that we're seeing not only through the fall, but also now into January and February for Bailey's. We are back in stock on the still core products and fall products are landing in September. And, and we have a first ready to wear program for Harper and Jones this fall that's lands in October. That brand has never had ready to wear. And the clothiers that sell Harper and Jones are super excited. We just finished our first photo shoot there, and they're already starting to show the clients, and the response has been incredibly positive. And we're excited about what that can bring to revenue and Harper and Jones growth and earnings. And finally, we're going to be launching our marketing strategy this fall. We have not had the ability to pursue marketing for over a year. We expect this to drive significant upside for all our brands in the second half of the year. So 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Thank you. There are no questions at this time. I would like to turn the floor back over to management for any closing comments.

Yeah, 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's continues to trend at pre-pandemic levels, even as we look into January and February wholesale bookings distilled. has confirmed that the products for fall will be landing in September. And we are very excited about what that can bring. Harper and Jones, it will be fully integrated in our Q3 results. And we also have several drivers there, including a readyware program, which we did not have last year. And then 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 PCOB gap audits and continuing to add accretive acquisitions to the company per our S1. 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.