Digital Brands Group, Inc.

Q1 2023 Earnings Conference Call


spk00: Hello and welcome to the Digital Brands Group Inc. Q1 2023 Earnings Conference Colon Webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may press star one at any time to be placed in the question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to John McNamara, Investor Relations. Please go ahead, John.
spk01: Thank you. Good morning, everyone, and welcome to the Digital Brands Group 2023 First Quarter Conference Call and Webcast. With us on the call this morning is Hill Davis, Chief Executive Officer of Digital Brands. Before we begin, we would remind everyone that certain matters discussed during today's call or answers that may be provided to questions may constitute forward-looking statements as defined under federal securities laws. These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the risk factors section of the company's quarterly report on Form 10Q filed with the SEC. Copies of these documents are available on the SEC's website as well as on the company's website. Actual results may differ materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update these statements for revisions or changes after the date of this call, except as required by law. With that, I'd like to now turn the call over to Hill Davis. CEO, go ahead, Hill.
spk02: Yes, thank you, John. As we stated during our fourth quarter fiscal year 2022 conference call in mid-April, we experienced significant operating leverage with the $250,000, including the non-cash expenses and approximately $250,000 in sundry expenses that we are no longer incurring since we completed the integration in late March. As you can see from our release, we experienced operating leverage on every line item, and we still expect to achieve some additional expense reductions going forward. Also, please keep in mind our e-commerce revenue for both January and February was half our March e-commerce revenue as we transitioned to a performance marketing agency. Our e-commerce revenue has extremely high gross margin and requires very little additional operating expense to execute, so the flow through would have been extremely high. This is why we're excited for the fall as we have one, e-commerce in full force, two, higher price point items like leathers, sweaters, and outerwear, three, barely 44 generating revenue from the wholesale channel again, and four, distilled with the full product assortment versus limited and busted sizing and inventory. This is why we expect to achieve EBITDA positive this fall, which by the way is only three months away. In addition to that, we are also excited about our two new revenue channels that we will launch this fall. The first is our proprietary affiliate program, which we have been building a founding group of influencers and affiliates for the soft launch in August. We believe this is an extremely scalable channel based on my past experiences and the positive reception we are experiencing. The second is our multi-brand retail store strategy. Based on the success of existing BTC brands at their own retail stores, coupled with the success of our multi-brand website, we believe that we can operate 50 plus stores in tier one locations. We have seen the revenues of our peers in these locations, and they are generating between 2 million to 4 million plus per store and are profitable at the store level. Again, this is 50 stores times 2 to 4 million dollars in revenue per store. We will use our free cash flow this fall to ramp our store growth and expect to add 5 plus stores a year for the next few years and accelerate it after that. We believe both channels will increase our e-commerce and wholesale revenue as these channels will increase brand awareness and customer acquisition. And we believe our membership program, which we will launch in the second half of June, just a few weeks away, will drive customer retention and repeat purchases. To that point, we are creating e-commerce only monthly drops like the sneaker business that will only be available to members and will be offered at special member pricing, which will not include a wholesale markup. The customer value proposition is very strong. As you can see, the first quarter was proof of the operating leverage we can achieve and the clear and short path to profitability. So with that, let's discuss the first quarter results. Results for the first quarter are as follows. Net revenues increased 48.4 percent in the first quarter of 2023, to 5.1 million compared to 3.4 million a year ago. Please note, we did not receive the full benefit of the e-commerce revenue in January and February as we had reduced digital advertising spend associated with transactions, transition to performance-making marketing agency. Gross margin profit for Q1 2023 increased 113.9 percent to 2.4 million compared to 1.1 million year ago. Our gross profit margin increased significantly to 47.9 percent from 33.2 percent a year ago. G&A expenses, including non-cash items, increased 8.4 percent to 4.6 million compared to 4.3 million a year ago. G&A as a percentage of revenue declined to 91 percent from 124.6 percent a year ago. Most notably, G&A expenses included non-cash expenses of 3.1 million compared to 1.8 million a year ago. These are detailed in our cash flow statement on our press release and in our Q&A. Excluding these non-cash items, G&A would have been 1.6 million compared to 2.5 million a year ago, which is a percent of revenues declined to 30.4 percent from 72.6 a year ago. Sales and marketing expenses increased 7.2 percent to 1.1 million compared to 1 million a year ago. That's a 7.2 percent increase in sales and marketing versus a 48.4 percent increase in e-commerce or total revenue. Sales and marketing expense ratio was 21.9 percent compared to 30.3 percent a year ago. Our loss from operations declined to 3.6 million compared to a loss of 5.6 million a year ago, excluding the non-cash items in G&A expenses. Loss from operations declined to 500,000 compared to a loss of 3.8 million a year ago. Let me repeat that. Excluding the non-cash items in G&A expenses, loss from operations declined to 500,000 compared to a loss of 3.8 million a year ago. And please note that these losses included approximately 250,000 in expenses associated with the integration and timing of the sundry transition, which will no longer be incurred as they have been transitioned into our Vernon facility and the sundry had counted as lower today than it was at the acquisition. Net loss attributable to common stockholders was 6.2 million for a loss of $1.8 per diluted share compared to 7.8 million or $59.18 per diluted share a year ago. Excluding the non-cash items from G&A and other income, net loss would have been 2.4 million for a loss of 42% per diluted share compared to a net loss of 6.1 million for a loss of 40.577 cents per diluted share a year ago. Our first quarter 2023 financial details are included in the company's form 10Q for the three months ended March 31, 2023. In closing, as 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 through new channels and e-commerce, and two, generate positive EVA-Dyne cash flow which will in turn allow us to invest our growth channels at an accelerated rate. This is a major tipping point and the first quarter results were the first and smallest benefit and proof of concept from our sundry acquisition. We expect the tipping point and the benefit and the proof of concept to only accelerate as we move into the fall. We are excited for the forecasted monthly free cash flow that we should generate this fall associated with one, positive EBITDA and two, the end of our MCA payments in early October. We should generate over 500,000 in free cash flow monthly starting after our last MCA payment in early October. We will use this free cash flow to accelerate the growth channels that are generating strong returns as well as potentially buying back shares if that is the highest and best use of capital. We should have the cash flow to pursue both our accelerated growth strategy and a share buyback program if that is the best use of capital and creates the highest returns. At these levels, obviously, this dual approach would be the best case for shareholders. Thanks everyone for their time and let's open it up for questions,
spk00: please. Thank you. Now we're conducting a question and answer session. If you'd like to be placed in the question queue, please press star one at this time. One moment, please, while we poll for questions. Once again, a star one to be placed into question queue. If there are no questions at this time, I'd like to turn the floor back over pretty further. A closing comment.
spk02: Yeah, well, thanks everyone for attending the call and I think the key thing here is we talked about the sundry acquisition being the tipping point. I think the first quarter results prove that. I think what's most exciting as we look forward, not only do we have our current growth drivers, we've got the affiliate program, we've got store growth, we've got significant cash flow and we'll use that to not only accelerate that but like as we said at these levels to buyback shares and drive shareholder return. I appreciate everyone's time and have a good day.
spk00: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.

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