Share price representation is imperfect. In fact, even at its best, it’s flawed. Need an example of that imperfection? Look no further than Digital Brands Group, Inc. (NASDAQ: DBGI). DBGI posted a record-setting quarter in November, presented decidedly bullish guidance, and foretold an acquisition that is planned to come sooner than later. And noting that the audit necessary to complete that purchase is complete, that deal can close in a matter of days. That’s a value driver in and of itself.
Better still, besides having a trifecta of value-creating news already known, DBGI has made no secret of its intent to transform itself from a quad of brands into a powerhouse of brands player in the apparel sector.
Thus, taking DBGI at their word, at roughly $3.08 a share, DBGI is valued lower than basement prices; it undervalues an asset portfolio that is growing its base. Numbers tell the story. In Q3, DBGI generated $2.2 million in revenues, a roughly 75% increase over the prior quarter. In addition, guidance was demonstrably bullish, with sales momentum leading to expectations for DBGI to roughly double its revenues to $4 million in the current quarter. FY 2022 guidance is even better, calling for upwards of $42.5 million in revenues.
Then, add into the equation that DBGI is accelerating its growth during one of the most challenging times in the apparel sector’s history and that investment proposition gets even more potent.
Navigating The Hurdles
Okay, perhaps investors believe DBGI will have difficulty getting inventories built for the holiday season due to supply channel issues. A valid concern, but not accurate in DBGI’s case. Management made clear that it has successfully navigated supply chain challenges and secured, in hand, substantial inventories to accelerate growth and meet rising demand in Q4 and in 2022.
The more excellent news is that DBGI has more than a revenue-generating tailwind at its back; they are expecting to close a deal to add more firepower to its brand portfolio. Better yet, that acquisition is expected to close this quarter. Hence, about 40 days and counting. And using history as a guide, getting in front of that announcement may be wise.
Keep in mind, too, that DBGI is on the fast track to growth. While they generated $2.2 million last quarter, they forecast revenues to reach between $37.5 million and $42.5 million during FY 2022. That represents a more than 350% increase over its 2021 projections. Not only that, DBGI is forecasting positive EBITDA for the new year as well, leveraging the power inherent to its shared services platform.
Here’s the best part- that bullish guidance does not include any impact from planned acquisitions. Thus, with social media and blogs speculating the deal to be big, current estimates may be highly conservative.
Brands In Motion
There’s more to like. Evidence supports that all its brands are in hyper-growth mode. Also, DBGI highlighted that 2022 will be the first time its current brand portfolio will contribute an entire year’s worth of revenues. Despite the record-setting gains announced this month, those results reflected only a limited period of revenue contribution from its brands.
Moreover, it’s important to note that its brand growth is happening with only a fraction of its marketing budget spent. Still, results to date have been phenomenal. Last month, DBGI reported its Bailey 44 brand saw a 379% surge and DSTLD a 52% jump in revenues after spending only a tiny part of their respective ad budgets. In fact, as of that report date, DBGI said it spent only about $30,000 of a marketing budget of roughly $500,000. Thus, the dollar-to-dollar returns from the campaigns are more than impressive. They also show that its message is reaching the right audience and markets at the right times.
And better still, those revenues are falling faster toward the bottom line. DBGI said its gross profit margin increased 96% year over year to 55.9%. That comes as the company realizes the benefits inherent to its shared services platform that adds efficiencies and cost savings. While the margins are hefty at roughly 56%, DBGI thinks they’ll get even stronger. As an end result, DBGI may generate EBITDA positive results as early as Q1 of next year.
Stable Of Respected Brands Drive Value Proposition
By the way, strengthening bottom-line results isn’t a coincidence. They come from a stable of brands that are attracting significant consumer attention. Its Bailey 44, DSTLD, Stateside, and Harper & Jones brands are firing on all cylinders. Better still, demand for its styles is surging, and DBGI meets that need by designing forward-thinking fashions and targeting consumers wanting inspired styling, responsible manufacturing processes, and comfortable wearability. DBGI’s current brand portfolio covers all the market bases. (Visit its portfolio of brands here)
That’s a big reason why revenues are doubling Q over Q. Of course, that makes sense. Great products, surging revenues. But, with the stock zig-zagging between highs and lows, a disconnect between the company and its share price is exposed. But, it’s a situation easily taken advantage of. That’s the timely takeaway.
Moreover, in addition to DBGI’s brands making a case for higher valuations, so do recent IPO’s that set a standard for industry multiples. The IPO’s of a.k.a Brands (NYSE: AKA) and Solo Brands (NYSE: DTC) actually help make a case for DBGI to be an $11 stock. How? By applying the same revenue multiples. But, here’s the kicker. DBGI may be in a better position to grow.
And that would justify a premium. Of note, DBGI’s balance sheet and capital structure are more inviting than AKA’s. Solo Brands, which raised about $220 million at its IPO, may also carry some legacy issues that DBGI doesn’t. Both of those stocks, by the way, are trading close to their IPO prices. Hence, it makes little sense for DBGI to be trading significantly lower than its, despite being in its best position ever to capitalize on new opportunities. Maybe not using the big banks for its IPO cost them some institutional attention. In a pay-to-play market, it’s possible. Also possible is that DBGI’s decline in share price is short-lived.
After all, DBGI appears to be growing at warp speed, and its actions are well-deserving of a higher share price, especially after a strong quarter and excellent guidance. But, notably, the pace at which its stock can move indicates that DBGI can return toward its $8.80 high sooner than many expect.
By any measure, DBGI’s earnings report was not a sell-the-news- event. Instead, it was a reason to go long and stay long. Thus, betting against their growth likely won’t stay in style for much longer.
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