Digital Brands Group, Inc. (NASDAQ: DBGI) stock continues to trend higher, increasing more than 8% higher since the start of last month. On Thursday, investors were provided at least one of the reasons for the impressive growth- a surge in e-commerce revenues. And not just a trivial amount. E-Commerce sales for its Bailey's 44 apparel brand, for instance, surged by more than 376% year-over-year. That's not all.
The focus toward digital advertising also pushed revenues for its DSTLD line of apparel higher by more than 52% since October 10th of this year, which is when the digital ad program for that brand started. More specifically, DSTLD experienced a 24% increase in its average order volume and a 76% increase in new customers. The better news is that those results come after an $8,000 ad spend. According to DBGI, the budget for set until EOY 2021 is set at $300,000. That compares to ZERO from the year before.
The results are equally impressive for Bailey's 44, whose 376% revenue increase was generated by only $20,000 in digital ad spending. An additional $200,000 is expected to be spent by the end of the year to accelerate e-Commerce sales for that brand as well.
The bottom line: DBGI's strategy is working. Moreover, they are proving that its model is more than the future of retail; it's a way to create substantial and sustainable revenues while building a dominant brand presence in the process.
Warming Up The Digital Channels
It also helps that the recent a.k.a Brands IPO went off without a hitch, setting a peer valuation comparison at about 5X revenues at the time. Accordingly, based on known sales and applying the revenue guidance to date, DBGI should be tracking closer to $11 per share. But, the gap between share price and intrinsic value should close as the company continues to warm up its digital advertising channels to build the upper-funnel campaigns. Gains in the past month show that's already happening.
Better still, DBGI is not shying away from its optimistic posture. Laura Dowling, Chief Marketing Officer of Digital Brands Group, is on record saying, "We expect to see a significant ROI and an increase in our year-over-year revenue on our digital advertising spend as we transition from the warm-up phase to our knowledge and targeted phase, especially as we move into 2022 and spend millions in digital advertising spend across all our brands." In other words, DBGI could be entering a state of hypergrowth.
Hil Davis, Chief Executive Officer of Digital Brands Group, expects that to be the case, saying, "we are excited to finally move into our growth phase, and believe this shows the power of our platform and the growth opportunity for 2022 and beyond. In fact, our 2022 revenue guidance does not reflect the ROI and revenue increase we are currently experiencing on our digital advertising spend."
Keep in mind, DBGI only became a public company during Q2 of this year. Hence, as analysts become more acquainted with the DBGI mission and business model, it's likely higher valuations are on the way based on peer models alone.
But, that's based on what's already in the portfolio. DBGI has made clear it intends to grow substantially in the months to come. In its recently filed S-1, management noted its expectation to continue to grow through acquisitions with an intention to acquire additional companies by the end of this year. It's likely those ambitions are in progress, with only the required GAAP PCAOB audits slowing the pace of closure. If that's the case, even with audits slowing the process, catalysts are in sight and could come as early as this month.
Indeed, investors appear to sense that to be the case. Volume at the start of each week has been surging, bringing the share price higher in the process. And while a definite pattern is drawn, trying to time a news release could be costly. On average, shares in DBGI move higher by more than 60% on revenue-generating news. Hence, trying to scalp a few percentage points may not be the best strategy in the DBGI investment proposition. Instead, this one presents a better buy-and-hold proposition, especially for investors wanting to tap into the early stages of DBGI's aggressive long-term plan to create shareholder value.
As noted, there is already a gap to fill.
Valuation Gap Ready To Fill
Its recent acquisition of Stateside apparel should have kept the stock closer to all-time highs near the $8.80 level. Weak markets and DBGI still being a relatively under-the-radar stock may have applied downside pressure. After all, while that deal had some dilution, it was well covered by the new revenues expected. Again, using the 5X multiple from a.k.a Brands, Stateside alone, with currently expected revenues, is worth about $2.60 per share.
Moreover, Bailey 44, DSTLD, and Harper & Jones add considerably to that number based on revenue guidance. While this morning's update provided percentages and not revenue guidance, triple-digit-parentage gains likely equate to millions in sales. Thus, the 5X model would put the DBGI share price appreciably higher even after its run since last month. And it's a fair model to use.
Again using a.k.a Brands as a reference, DBGI could justify at least a doubling in price. Here's why- From its IPO filings, a.k.a. Brands posted 2020 revenues of $215.9 million and $218.0 million in the first six months of 2021. That translated to a jump in net income of 81% over the prior period. Keep in mind, too, that jump is doing more than showing their growth; it's proving the same sales model used by DBGI. Thus, as a barometer for the sector, it's excellent news for DBGI.
Justifying A Higher Price
Back to the valuation. Making a long story short, by the time investors model for forward-looking revenue expectations of $436M and adding debt and subtracting cash, a.k.a Brands is trading at a roughly 5X revenues multiple. Again, great news for investors trying to understand the DBGI opportunity.
Using the same calculations and modeling for the guidance midpoint of $40M, assuming 17 million shares outstanding after the Stateside acquisition with a 5X multiple, a more appropriate value for DBGI shares rests at roughly $11.00 per share. That's about 244% higher than current levels. Keep in mind, too, additional acquisitions are expected. Thus, modeling for FY 2022 revenues of $40M could be conservative.
Also, comparably, DBGI has far less debt as a percentage of income, faster-growing revenues, and an impressive capital structure that provides substantial room for growth while maintaining a relatively low number of shares outstanding. Assuming dilution from its recent acquisition of Stateside of about 5M shares, DBGI should have roughly 17 million shares in the market. AKA has about 127M shares outstanding.
But, the side-by-side comparison is more compelling in DBGI's favor after noting the similar business model and what investors were willing to pay to be part of the AKA story.
Faster Growth In DBGI Brand Portfolio
Since August, DBGI has noted that DSTLD inventories are building to meet a considerable increase in demand. Moreover, its Bailey 44 brand is following suit, also seeing an acceleration of wholesale booking orders ahead of the Fall season. In fact, DBGI added in its quarterly update that Bailey 44 is nearing wholesale order levels that compare favorably to pre-COVID levels. Now, with Stateside added to the mix, the upcoming Fall season could be the fuse to ignite substantial company-wide growth.
Better still, DBGI expects more than posting higher revenues. They expect to turn EBITDA positive in 2022. Bottom line, earning only half the AKA multiple could send its valuation soaring. Also, with additional acquisitions expected, the story is far from complete on the asset front. Thus, valuing DBGI assets today could understate its value significantly over the next few months. Actually, the next few weeks could have investors staring down a higher and well-deserved valuation.
Know this, too. Taking an interest in DBGI at these levels also takes advantage of a "new' post-IPO Digital Brands Group. And emerging as the latter since Q2, DBGI is in its best position operationally and financially to drive shareholder value higher. Moreover, its capital structure remains ideal for acquisition, and the company's ability to structure deals on company-friendly terms is also a value driver in the weeks and quarters to come.
Thus, looking past the inherent strengths of DBGI is more than shortsighted. It leaves too much value unrecognized. But, to be fair, that's not all bad news. For investors paying attention, it exposes opportunities.
Therefore, taking advantage of an intrinsically undervalued DBGI may be a wise consideration ahead of expected acquisitions and surging brand sales. Indeed, heading into the tail end of Q4, much looks to be in play.
And with a tight float and low O/S counts, as history shows, the stock can fly on value-enhancing news. Thus, heading into the holiday sales season, DBGI stock is an excellent candidate to buy and hold. It is, after all, currently priced as a gift that can keep on giving.
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