Digital Brands Group, Inc.

Welcome to the Digital Brands Group third quarter 2024 conference call. At this time, all participants are in listen-only mode. 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, 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 for management is Hill Davis, Chief Executive Officer, who will provide an overview of the quarter. At the end of the prepared remarks, Hill 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 could be no assurance that the forward-looking information will prove to be accurate. With that, I will now turn the call over to Hill Davis. Go ahead, Hill.

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 macroeconomy 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 InterCommerce 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 22nd through November 7th. This was prior to the 30 days they took over, which was September 22nd to October 21st. 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 campaigns, services starting this week. This partnership was the first step in a multi-step growth strategy coupled with the launch of Avvo. Other initiatives through this partnership which we are in the process of launching or will launch, are as follows. Adding several apps to our Shopify platform that they have set increased conversion rates of their other brands they work with by 20% plus. Selling on other digital platforms such as Amazon and TikTok, which we plan to launch in Q1. Launching influencer campaigns. This is going to be a big focus for us, partnering with influencers and leveraging different platforms. And with VaynerMedia by our side, there's a lot of reception now for that. Launching limited edition product capsules every month that are only available online in small quantities that have exclusive pricing, fabrics, and design. And this really follows the sneaker industry in terms of the shoe drops. So we plan to focus on that for all the brands for our DTC channel. Please note that we had none of these 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. So I think 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. And that's really important because we feel, based on everything we've seen now, that that was the bottom. And it was intentional because it did not make sense based on our conversations with other companies to invest heavily in digital marketing. And as everyone's noted, which I'll talk about here in a second, the wholesale and the consumer's been soft. So not only in addition to these that's important, the company also will benefit by an increase of over $4.5 million in earnings in 2025 that is associated with amortized non-cash expenses which includes stateside goodwill, including at the end of this year, as well as $3.1 million in amortized interest expense, which was also some of cash ending at the end of this year. Again, next year, we'll 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 in Sundry, which has met zero resistance. And that alone should add more than $500,000 a year to gross margins. And we know that it's hit zero resistance because we've been selling wholesale for spring into the market already. As you can see, this really reflects a major inflection point in our business as we have shifted from cleaning up the balance sheet into a growth mode. Given the majority of our cash was being used to pay down debt and liabilities, we could not invest properly in growth. Even if we 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 all the luxury brands. So 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 is stabilized and the balance sheet has been meaningfully 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 we needed the cash flow in order to do this. We believe that we found the right digital partner in VaynerCommerce, and we also now have the cash flow to invest in the growth. We're extremely excited to move into this transition and are already excited about the results we have seen thus far with only one piece of the product or the growth initiative being rolled out. with others coming starting this week and going forward. So with that, let's discuss the third quarter results. Net revenues were $2.4 million compared to $3.3 million a year ago. I think the important thing here is 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 includes making multiple samples because they wanted their own sizing. This meant that this account was net negative in cash contribution. So while it added revenue, we lost money on it. So going forward, we will lose this revenue, but we will increase our profitability. This was over $800,000 of the difference in the year over year difference. And I think that's really important to understand is that while it impacted revenue, it did not, it actually improved profitability and will continue to improve profitability as we move through next year. Net revenues were also negatively impacted by limited digital advertising spend, which we've discussed, which resulted in low e-commerce revenue. And also, as we've discussed, since that inflated e-commerce, we've seen a meaningful increase in that digital revenue, and that's with them just A-B testing product right now with content that we had. We're reshooting a lot of content with them next month, and they are getting a good gauge on what types of ads are working best. So we will shoot that content based on what ads are performing best, and we just had a call about that today. Gross profit margins were 46% compared to 52.3% a year ago. The biggest factor in this decline is actually the fixed cost associated with our gross margins, which includes the entire warehouse rent and all the labor expenses associated with it, our pattern makers and sewers, as well as some design member experiences. So keep that in mind. There's a lot of fixed costs in our gross profit margin, so these will naturally lift as our revenue lifts, and that's really important to understand is that 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 $1.3 million to $2.4 million compared to $3.7 million a year ago. That is a significant reduction year over year to a tune of $1.3 million. Also included in our GNA was $1.6 million in non-cash expenses, which includes goodwill expenses for the brands we've acquired, depreciation, and other items like that. GNA also expenses declined sequentially from the last quarter by over $500,000. So as you can see, we continue to get leverage on our cost savings and the intentional way we're managing the expenses. And now that we're going back into growth mode, we're excited to see what's going to happen there. Delta marketing expenses were $655,000 compared to $1.2 million a year ago. Delta marketing expenses ratio was 26.9 compared to 35.3% a year ago. Please note that the majority of the sales and marketing expenses is the marketing team. And as we stated, we have now outsourced our sales and marketing team to VaynerCommerce. So you will see this cost go down as well and supplement that increased digital dollars going forward. 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. And to that point, As you can tell, even though our revenues were lower, our net loss was significantly lower. A lot of it attributable to the fact that that 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 means the annual benefit of this interest expense being fully amortized is $3.1 million a year that will benefit net earnings in fiscal 2025. Net loss for diluted share was $1.63 compared to a net loss of $14.55 a year ago, a significant increase. So in closing, What I'd like to say, and I think it's really important, is that we're really excited about this transition that we're making from having to really focus on cleaning up the balance sheet and a really difficult macro market into now more of growth. We have a strong partner in VaynerCommerce and are already experiencing better results. And these results are only from the digital advertising channel only and do not include our text messaging, our email, our influencer partnerships, our monthly capital collections, and other initiatives we have not announced but are finalizing. In addition to that, 2025 will experience a $4.5 million earnings benefit versus 2024. This is a significant lift to 2025 earnings, and that is for any benefit from the growth initiatives noted above. That concludes our third quarter 2024 conference call. I'm going to read through some questions and answers that were sent to us in advance of the conference call. One of the first questions is what does the convertible debt look like on the balance sheet? 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. And the only debt that we have is longer term debt. And that is patient debt as well. So we've really cleared that overhang, which is really important because that pressure is not there. And that's going to allow us to really focus on growing this moving forward. Also, there was a question about just the Vayner relationship and how it came about and what it looks like. So we did VaynerMedia because they had reached out to us but felt like we were too small and didn't have enough going on to make it happen. We followed back up with them recently, especially with the launch of Avvo. And as they dug into what we were doing, they really got excited about it. And, in fact, at first they had mentioned that they probably weren't right for us. But then as we circled back, they dug in a little bit and said, you know what, this makes a lot of sense, even to the tune of the fact that it's a heavily incentivized percentage of revenue deal. So they're putting their money where their mouth is. And to put that in perspective, on every call, when we do a couple calls a week, we have 15 people from their team on the call. So they are highly invested in this, and I think that's really important. And I'm really excited about what we can do because we have a pure performance marketing group that's worked with a lot of brands, that has scaled a lot of brands, now fully focused on this. There's no way we could replicate this bench, if you will, in terms of depth and width and knowledge in any way on our own without spending millions of dollars. And so we're excited about what that is and what that's going to bring. And we're really excited about creating some really amazing content starting in December and going forward. And just them really taking this over. I mean, right now, we've just started spending a little bit more than what we've been spending. I mean, we're only spending about $1,500 a day. That's it. And we're already seeing a meaningful lift. So they're A-B testing the results, and they're seeing what works best. And based on that, we plan to shoot content in the first two weeks of December based on the type of results that are working the best. And we plan to shoot that with influencers and really lean into the influencer-heavy world. We're excited about what that can bring. And then finally, I just want to really iterate that this Q2, the revenue decline, was really driven by a wholesale brand that was actually net negative for us on the operation margin. It was about 7% gross margin and net negative on the operating margin. So while the revenue took a massive hit, the gross margin will increase significantly, as will, and when I say gross margin, I mean absolute dollars flowing, plus the price increase in sundry. And so we're excited about that. And we've actually had several majors reach out to us that we're in discussions with to add sundry and state sites do and that's another reason we decided to drop them is that these other majors have just as big of a reach with much better margins and much higher quality brand name associated with them. So we're excited about where that is as well. So that concludes the quarterly conference call. I appreciate everyone's time and everyone have a nice day.

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