Digital Brands Group, Inc.

Greetings. Welcome to the Digital Brands Group, Inc. fourth quarter and fiscal year 2021 earnings call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to your host, Phil Davis, CEO. Thank you. You may begin.

All right, good afternoon, everyone, and welcome to the Digital Brands Group fourth quarter and fiscal year 2021 earnings conference call and webcast. All participants will be in a listen-only mode. The earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act as 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 the statement is made these forward-looking statements are based largely on our company's expectations and are subject to a number of risk and uncertainty some of which cannot be predicted or quantified and are beyond our control in addition to this further developments and actual results could differ materially from those set forth and contemplated by our underlying forward-looking statements a lot of these risks and uncertainties there could be no assurance that the forward Looking information will prove to be accurate. The company will be hosting a Q&A session at the conclusion of prepared remarks. Please note that this event is being recorded. So with all the legal language out of the way, let me please start by saying, you know, we continue to build momentum throughout 2021 as we are able to leverage the cash raised on our IPO. We believe this momentum is illustrated by our fourth quarter revenue growth of 425%. as well as our recently announced January and February 2022 revenue growth results, which we cited earlier this month. Our operating losses were driven by our low revenue results, especially in the first nine months of 2021. And as you saw in Q4, we continue and get leverage on these costs, and we continue and expect those to go throughout 2022 as we continue to see this increased revenue, as we cited in our March press release. Also in 2021, we added two brands to our portfolio. We also, in January of this year, announced the definitive agreement to acquire Sundry, which we are very excited about, and we are confident that we will continue to drive our revenue growth in 2022 and beyond, and it's both organic revenue growth as well as acquisition revenue growth. We are also extremely confident that we can leverage our fixed cost in 2022 and beyond with the revenue growth that we experienced in Q4, and as we noted in our March fresh release regarding January and February numbers. So I'm going to talk about the fourth quarter, and then I'll talk a little bit about the fiscal year, and then just give some closing remarks and really open it up to Q&A. I think I just know from our side of the business, we've never been more excited about what we've been able to do, being able to come together, use the cash from the IPO to really grow this business and really starting to see the basically a momentum grow. And I think that's what people don't necessarily understand about an operating business is it takes going from zero to one is the hardest. And then one to two to three to four to five is significantly easier every step of the way. And 2021 was all about going from zero to one. And I think what you're seeing in Q4 is us starting to shift out of one into the upper gears. And that's what is really exciting, and we saw it across all parts of the business. The results for the fourth quarter, net revenues increased 425% to $4 million in the fourth quarter, compared to $0.8 million in the fourth quarter of 2020. Most importantly, this revenue growth was experienced across all all our portfolio brands and meaningfully across all our portfolio brands. So we're seeing success in every single brand we own. The increase in net sales was driven basically also by the inclusion of Stateside and Harper and Jones, which also for the record saw increased revenue growth in Q4 as well. So again, all brands are experiencing meaningful revenue growth, even the brands that we acquired in 2021. Gross profit margin increased 42.2% year over year to 37.4% from a negative 4.8%. Gross profit increased by $1.5 million due to improved gross margins across all our brands, both acquired brands and owned brands as of 2021. And I think this is the power of getting that operating leverage that I talked about, which creates cashflow that goes through the P&L and drops to the bottom line. G&A expense margin declined by 124% to 124% from 248%. As you can see throughout the quarters, we continue to leverage our fixed costs with higher revenue. We expect to continue to see significant improvement in this margin driven by our revenue growth, which is noted in our March press release regarding January and February revenue growth so far. So again, the critical piece here is just continuing to see that operating leverage in the business driven by our revenue growth and success of both marketing, new customer acquisition and retention as well. Sales and marketing expenses increased from 33,000 in the fourth quarter in 2020 to 1.4 million in Q4 of this year. We saw a meaningful increase in revenue associated with this increased marketing spend. This allowed us to acquire a significant amount of new customers who are already showing a propensity to repeat purchase. And I think that's really critical in these businesses is that you're able to basically drive repeat purchase after customer acquisition. So it's one thing if you're just driving new customer growth and then there's no repeat there. That ends up being kind of an empty bucket that just flows cash out into the ether. However, if you're driving new customer growth and then those customers are coming back, then what you're able to do is really drive significant operating leverage, revenue, and cash flow to the bottom line. And we are seeing that repeat purchase, which we're really excited about. And that's really a testament to Laura Dowling, our CMO, and her team and what they've been able to do with the focus of acquisition in Q4 and both acquisition and retention so far as we go through this year. And we're seeing both of those work very successfully. All this was achieved without any cross-merchandising across our brands. And I think this is really critical. In Q4, we focused on just the brands alone and not cross-merchandising the brands. Historically, when we've cross-merchandised our brands, we have seen a meaningful increase, as noted in our S1 and our 10Ks, of those products getting a massive lift in revenue. And we plan to really roll this out as we move forward in 2022 as this cross-merchandising But really what Laura and her team wanted to focus on was just getting the brands tight, getting customers into the pipeline. And now that we've built a nice new customer acquisition pipeline, we're now able to take those and cross merchandise our brand. So example, we could take distilled denim with the Bailey's top or a stateside t-shirt or a stateside bottom with the Bailey's top and a distilled top or a leather jacket or a cashmere sweater. And that's the power of what we're building. So everything in Q4 is built on just brand-specific marketing. As we move throughout 2022, we'll continue brand-specific marketing in addition to the successful cross-merchandising that we've experienced in the past. And the nice thing about that is there's no cost for that revenue because it's a repeat customer purchasing. There's no customer acquisition cost to acquire that customer. They're already in our database, and all we'll do is cross-merchandise them the different brands we own to them. So the flow through on that is extremely high. Our operating expenses was 5.4 million, sorry, 5.4 million in the fourth quarter this year versus 318,000 in the comparable period a year ago. This increase was driven by all non-cash expenses. And net loss attributable to common shareholders in the fourth quarter of 2021 was 9.7 million or a loss of 76 per diluted share which included $3.8 million in non-cash expenses. And this compared to a net loss last year of $3.97 per share or $2.6 million. So meaningful improvement in our loss per share, which as we said, as we drive revenue and we also are able to leverage that revenue over our fixed cost, we're seeing this improvement and that's what's driving that. Results for fiscal 2021, I'll just touch on a very high level. Net revenue for fiscal 2021 increased 44.8% to 7.6 compared to 5.2 million in 2020. And the net loss attributable to common shareholders in fiscal 2021 was 32.4 million or 421 per diluted share versus a loss of $16.15 per diluted share. And the loss this year included $16.4 million in non-cash expenses. And all that's detailed in our 10-K. And in fact, our full year 2021 financial details are included in the company's form 10-K for the 12 months ended December 31st, 2021, which has been filed with the SEC. So as you can see, both for the quarter as well as for the full fiscal year of 2021, we saw significant leverage in the fixed cost to the business. And we also saw meaningful revenue growth as we were able to take the IPO proceeds and really develop a marketing plan for the brands, really get those brands going with their customer acquisition funnels. Now we're going to take those customers. We're going to cross merchandise them. We're going to continue to drive the repeat. And then we're going to continue to drive new customers in. The thing about it is like a cycle. You drive them into the funnel and you convert them into customers and Then you drive the repeat, and then you drive the cross-merchandising. So Q4 was just about part one of the three-part phase, drive them into the funnel and get them to purchase. As we move to 2022, we'll continue to drive that, but we'll also benefit from the repeat, which we're already seeing, as noted in our January and February revenue results that were reported in March. And then, in addition to that, we'll also have the cross-merchandising benefit, which we've historically significantly benefited from, and we haven't even started to touch yet. So that's the three-step process of the marketing funnel. And again, Q4 was just the first part of it. Q1, as we noted in January and February, is the combination of the first with the splash of the second. And as we move through the year, we'll continue to drive the first, we'll drive the second, and then we'll especially drive the third. And that's really exciting because as you move through each of those stages of the funnel... your flow through gets significantly higher. And I think that's what's really critical is the first phase, which was just Q4 is actually the lowest flow flow through of that. When you get into Q2 and Q3, you're actually getting into, I mean, sorry, when the phase two and phase three, you're getting into high flow through because there's no customer acquisition costs. That's really powerful. And that's what we're getting really, that's what we're really excited about. The marketing team is really excited about. So with that, we are basically cannot stress enough that we're driving both significant organic and acquisition revenue growth. We expect to continue this going forward as we noted in our March release around January and February results. Additionally, our results for the fourth quarter and fiscal year show that we are getting significant operating expense leverage and we expect this to continue going forward given our revenue growth as well as the fixed cost of our business. And we've never been more excited about our business, our results, and our fiscal 2022. With that, I appreciate everyone's time. We look forward to the continued momentum. And this concludes our fourth quarter and fiscal 2021 earnings call. And let's open it up to Q&A, please.

Thank you. At this time, we will 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 your line is in the question queue. You may press star two 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. Our first question is from Sarah Juranova of Quantable AI. Please proceed with your question.

I'm sorry, can't hear you.

Sarah, are you there? Yes, can you hear me now? Is it better?

Yes.

Okay, perfect. Thank you so much for the call. I have two questions. Firstly, I would like to ask a bit more about the customer acquisition, so mainly the distilled brand on Amazon. From a customer's point of view, I'm just slightly confused as the items seem to have minimal reviews on the site. So I'm wondering if you could give some details on your average customer's journey and how that pertains to the customer acquisition strategy. And then secondly, in a similar vein, you've announced a great increase in predicted revenue. So could you give some details on the causal basis of that revenue increase, please? Thank you so much.

Yes, I'll answer the second question first, which is, as we've noted in previous releases, We have a fiscal year 2022 revenue guidance of $37.5 to $42.5 million, and so that's still the case. So nothing's changed from there. In terms of the Amazon comment, we just started testing into Amazon, and it takes about three months for the channel to warm up. So I believe, and Laura, you can correct me if I'm wrong, but when did we start it? October or November with Amazon?

Yeah, we started in October, November.

So we're starting to roll out that. I'm sorry. Go ahead, Laura.

Oh, sorry. I could, I could answer that question as well. Um, we, it takes about three months to grow relevancy on the platform and yes, reviews are a part of that relevancy that you need to grow and you don't really spend against advertising. You don't spend a great deal against advertising until it's efficient. And the platform Amazon needs it to be efficient when we have enough reviews. We have two reviews on there now. We're working with Amazon on getting additional reviews and some other programs on Monday. We're actually going to do, we're going to be on their Instagram channel, Amazon fashion, and we're going to have a feature on distilled that'll be to their audience about 1.9 million followers. So that's something that we've been working on. We've also been working on the merchandising assortment. I'm, changing up the assortment slightly. And once we make some modifications there, we'll be driving more traffic towards our Amazon shop. I wanted to clean up and change the in-seams a little bit based on what we're seeing from customer feedback and responses and what we have on our own site before driving more traffic there. You know, that makes sense. So you'll start seeing on Monday exciting things happening in terms of more traffic being driven there from Amazon pushing us out on their own Instagram channel. as well as a varying assortment. And in the following weeks, we will have more reviews that will be coming because that's something that's been on our radar.

And I think, too, for us, the way we look at Amazon, it's a great men's channel especially, and there's some things we're looking at that we think would pipe really well into there. So we're trying to learn and grow that. So this is also kind of a beta test for us, knowing that there's stuff we're looking at coming down the pipe that would fit really well in there, and we can accelerate everything based on the learnings we're getting now.

Okay, thank you so much.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question 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 additional questions. There are no more questions at this time. We have reached the end of the question and answer session and I will now turn the call back over to Hill Davis for closing remarks.

All right, great. Thanks everyone for their time and for their support. And as I said, I mean, we've just never been more excited. We know that the hardest piece of growing a business is zero to one. We've shifted through that and now we're taking that momentum and we're going to just continue to accelerate it and move forward and we're going to continue to see what we've seen so far is growth across all our brands and revenue and significant operating leverage as we experience that. And we expect we'll continue to leverage that, as we said, in our January and February results. And we're really excited about what's going on. And as you can tell by Laura's response, too, there's a lot of stuff that's going on. So we hope to continue to drive this forward. We expect to, and we look forward to talking to you all very soon. 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 and have a great day.