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Taking Exception To The Bearish Coverage Of Digital Brands Group, Inc… Here’s Why ($DBGI)

An article published by Retail Dive on April 1, 2022, may have awakened the bears, but its information could lead them to a trap. In fact, at roughly $0.19 a share, betting against Digital Brands, Inc. (NASDAQ: DBGI, $DBGI) stock running significantly higher by year’s end may be pushing risk to its limits. That’s not an overly bullish assumption, either. Even Retail Dive, while decidedly bearish, implied that DBGI has the assets, brands, and the momentum to create potentially extraordinary value over the next six months. But, while its article sprinkles in some pro’s, there are some con’s in the coverage that need rebuttal.

First, they may have been way too aggressive in their coverage of the “Going Concern” statement. Using the clickbait term “bankruptcy” when it’s found nowhere in the passage is a good example. But what was more disturbing is that the author even contradicts his own statement, writing just after, “The company disclosed in its 10-K that it may have to file for bankruptcy protection, or seek other options, if the company cannot come up with sufficient funds to run operations” that “The bankruptcy language was not included in the company’s most recent prospectus or quarterly filings. Its latest S-1, as well as the 10-K, included a “going concern” warning that it might not be able to survive without sufficient capital.” In other words, the company never “disclosed” anything of the sort. Instead, they included a “Going Concern” statement, which, admittedly, no company likes to have included in financial filings.

Be Fair In Challenging Times

But, be fair. These are challenging times. Last year, the Wall Street Journal reported that retail behemoths, including restaurant and entertainment firm Dave & Buster’s Entertainment Inc. ($PLAY) and cruise operator Norwegian Cruise Line Holdings Ltd. ($NCLH), were among the companies that included such notices in their filings. Dave & Buster’s and Norwegian have not filed for bankruptcy. By the way, the WSJ added that of 5,891 listed companies, 18.8% received such warnings from their auditor in the past year. So, nearly one in five companies share the same notice, and not all, by any means, are considered penny stocks.

Still, investors should be cautious and read all public filings before investing in any company. There are always risks. But, there are ways that companies mitigate them, and one is to raise money. The Retail Dive author was shy of the timeline to report that in May, DBGI raised gross proceeds from a public offering that added $9,347,450 before deducting underwriting discounts and commissions and other offering expenses payable to its balance sheet. There are further warrants to up the proceeds, which have not yet been reported on. So, DBGI may add more to the coffers.

Thus, while the report may have been embellished, it’s thesis is quieted now. And it should be. Yes, DBGI posted a significant paper loss. Still, most of that net loss included non-cash expenses associated with a change in the fair value of contingent liabilities and amortization of loan discount and fees of $3.0 million. So, things aren’t near as bad as they were made out to be. And there’s actually plenty of good.

A Bullish Revenue Update

In its report, DBGI showed net revenue surging to $3.4 million, increasing 740% year over year. Supporting those revenues was an increase in gross profit margins by 94% year over year to 42.9% from a negative 50.8% a year ago, resulting in an increase of $1.7 million in gross profit dollars. That’s not all. After apples-to-apples accounting, the net loss per diluted share dropped appreciably to $0.59 versus a net loss of $4.55 per diluted share a year ago, improving 671% year over year.

Further, DBGI supported the report saying they expect growth to remain robust, noting that in addition to year-over-year revenue growth, its current wholesale orders for this summer and fall indicate that a tailwind is in place to continue sending revenues higher. In addition, DBGI also said that revenue growth creates leverage on its fixed costs, positioning the company to maximize that growth by fully leveraging its fixed costs. 

Thus, looking at the bottom line for a growth company investment decision isn’t always the best place to look. For the most part, topline growth is the most-watched indicator for growth companies. While Tesla ($TSLA) and Amazon ($AMZN) aren’t exactly comparable today, they once were when paper losses showed little indication of a path to profitability. Indeed, fortunes have changed for those two.

Momentum On Its Side

They are likely to change for the better at DBGI as well. Since going public last year, the company has been in hyper-growth mode, setting new revenue records quarterly. Moreover, DBGI has always been a story of two companies, one pre, and the other post IPO. Investors today have the latter, which is a good thing. By the way, concerns raised from 2019, 2020, and a CEO’s personal life are untimely moot points for all intents and purposes.

The company is much better positioned today than at any time in its history for rapid growth. And they got to that position despite pandemic-related headwinds that stuffed the logistical channels. Thus, while 2021 was its best year, 2022 is expected to be much more productive. And with compelling assets including Bailey 44, Stateside, DSTLD, Harper & Jones, and soon to be added Sundry, that’s a likely assumption.

Frankly, with an impressive stable of brands, more than $9 million in cash, and a revenue-generating tailwind at its back, the path of least resistance, especially at current prices, appears to be to the upside. In fact, assuming that DBGI reaches its revenue guidance between $37.5 million – $42.5 million, even with dilution, the shares could be more appropriately valued at above $1.15 using the midpoint of the guidance and a conservative industry revenues multiple of 1.5X.

Stay Current, DBGI Moves Fast

Thus, while DBGI can attract headlines, keeping current with what’s happening is essential. Digital Brands Group is a fast-moving company with many moving parts. And concerns raised in April, reflecting the need for cash, are not only alleviated but have been turned into fuel for growth after a successful capital raise. Yes, at $0.19, investors at higher prices are indeed feeling the pain. However, the sum of DBGI’s parts today shows that price may not only undervalue the company but also be offering an opportunity to average down ahead of its expected acquisition of Sundry. Those who follow DBGI know that the stock can run when good news gets posted.

Here’s the bottom line. With two sides to every trade, expect to get beaten up a bit. However, getting beaten up and losing the fight are two different things. With that in mind, based on its brand power, capital position, and acquisition strategy, the DBGI bulls may ultimately win this battle. In fact, with the closing of Sundry said to be imminent, a solid balance sheet, and more revenue growth expected, even the staunchest bears may be sent to hibernate.

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