Digital Brands Group, Inc. (NASDAQ:DBGI) is a curated collection of lifestyle brands, including Bailey 44, DSTLD, Stateside, Sundry and ACE Studios, that offers a variety of apparel products through direct-to-consumer and wholesale distribution. The company reported its first quarter 2024 financial results, showcasing significant operating leverage as it laps the first year of the Sundry acquisition.

For the full year 2023, Digital Brands Group reported annual revenue of $14.92 million, annual net loss of $10.25 million, annual operating cash flow of -$6.01 million, and annual free cash flow of -$6.04 million. In the first quarter of 2024, the company generated revenue of $3.58 million, a gross profit margin of 48.1%, and a net loss of $0.68 million, or $0.46 per diluted share.

The company's first quarter results were impacted by a timing shift in wholesale shipments, with a majority of March shipments being pushed into April. Management expects this shift to benefit the second quarter results. Additionally, the company opened a new retail store in mid-April 2024, which is already generating healthy week-over-week revenue increases.

Business Overview

Digital Brands Group operates a portfolio of four key brands - Bailey 44, DSTLD, Stateside, and Sundry. Bailey 44 is primarily a wholesale brand that the company is transitioning to a digital, direct-to-consumer model. DSTLD is primarily a digital direct-to-consumer brand, with some select wholesale distribution. Stateside and Sundry are both primarily wholesale brands that the company plans to transition to digital, direct-to-consumer models.

The company believes that successful apparel brands need to sell through all revenue channels - direct-to-consumer, wholesale, and retail stores. By leveraging an omnichannel strategy, Digital Brands Group aims to efficiently acquire customers and drive high customer lifetime value. The company's digital-first heritage gives it the ability to strategically analyze customer data and optimize inventory management.

Recent Developments

In April 2024, the company opened a new retail store at the Simon Premium Outlet in Allen, Texas. Management expects the store to generate over $1.5 million in annual revenue and over $500,000 in free cash flow on an annual basis.

The company also faced some supply chain disruptions in the first quarter, with a shipment container being held up at the Los Angeles port due to an X-ray check. This resulted in a shift of March wholesale shipments into the second quarter. Management does not expect this issue to recur.

Outlook

Looking ahead, the company expects to benefit from the shift of March wholesale shipments into the second quarter, as well as continued momentum from the new retail store. Additionally, the company has strong fall bookings and plans to make strategic e-commerce decisions in the second half of the year that should further boost performance.

Financials

Digital Brands Group's gross profit margin improved to 48.1% in the first quarter of 2024, up from 45.5% in the prior year period. This increase was driven by the company's ability to leverage fixed costs across its brands.

Operating expenses decreased significantly, from $5.71 million in Q1 2023 to $1.95 million in Q1 2024. This 66% reduction was primarily due to cost-cutting measures and synergies realized from the Sundry acquisition, including the elimination of redundant warehouse, office, and fulfillment operations.

The company's net loss from continuing operations improved from $6.23 million in Q1 2023 to $0.68 million in Q1 2024, a 89% reduction. This was driven by the lower operating expenses and reduced interest expense.

Liquidity

As of March 31, 2024, Digital Brands Group had a working capital deficit of $15.35 million. Despite improved financial metrics, the company still requires significant capital to meet its obligations and continues to explore various financing options, including secondary offerings and debt financings, to provide working capital and satisfy debt obligations.

Risks and Challenges

Digital Brands Group faces several risks and challenges, including its substantial indebtedness, supply chain disruptions, and the need for additional capital to fund operations. The company's ability to continue as a going concern is dependent on its success in securing additional financing and achieving profitability.

The company's substantial debt, with an aggregate principal amount of $9.1 million as of March 31, 2024, could make it difficult to satisfy obligations, require a significant portion of cash flows to be dedicated to debt service, and limit the company's financial flexibility. Digital Brands Group is currently unable to repay or refinance certain borrowings, which could force the company into bankruptcy or liquidation.

Additionally, the company is subject to global supply chain disruptions, including increased costs for raw materials, inbound shipping, and production. While Digital Brands Group has been able to pass along some of these increased costs, there is no guarantee it will be able to do so in the future.

Conclusion

Despite the challenges faced in the first quarter, Digital Brands Group is poised to benefit from significant operating leverage as it laps the first year of the Sundry acquisition. The company's focus on cost-cutting, strategic e-commerce decisions, and the opening of a new retail store are expected to drive improved financial performance in the coming quarters.

However, the company's substantial indebtedness and the need for additional capital to fund operations remain significant risks. Investors should closely monitor the company's ability to secure financing and achieve profitability in order to ensure its long-term viability.