Digital Brands Group, Inc. (NASDAQ: DBGI) shares turned higher on Tuesday after announcing it closed its planned acquisition of Stateside apparel. Shares jumped more than 9% pre-market and continued to move higher in the regular session. It’s an acquisition that was expected to happen. Nonetheless, now that DBGI closed the deal, investors are rallying around how its new source of revenues will impact DBGI going forward. Obviously, investors are bullish on its prospects; DBGI, too, expects the latest brand to be immediately accretive to operations in Q3 and fiscal 2021. Better still, a new $17.5 million equity purchase agreement announced in the same release should fuel DBGI’s acquisition strategy in the back half of this year.
Keep in mind, too, its revenue contribution from Stateside follows those from Harper & Jones, a company that came with its IPO in Q2. That company alone is expected to bring more than $900,000 in revenues per quarter. And those sales will add to a back half of 2021 that is shaping up to be a potentially substantial period of growth, with two other portfolio brands, Bailey 44 and DSTLD, also gearing for accelerated growth as the country emerges from pandemic-related headwinds.
The value proposition gets more interesting after taking a sum total of its parts. Using apparel industry multiples for revenues and EBITDA, which value at nearly 10X and 12X, respectively, DBGI’s rally on Tuesday is more than deserved. It’s overdue. In fact, combining DBGI’s known sales with its guidance, a more accurate share price could be near the $9.00 mark. This morning’s action could be the start of that move higher.
And, while its small trading float and roughly 11.3 million shares outstanding can create some violent swings, it appears as though the path of least resistance on a multiples basis is to the upside.
Adding To Its Brand Portfolio
Furthermore, from a valuation perspective, there’s a lot of space to fill between its share price and asset-based intrinsic value. And if DBGI meets its decidedly bullish guidance, higher prices can be earned and held.
Of note, DBGI expects revenues from Harper & Jones, Bailey 44, and DSTLD to all increase in the back half of 2021. Perhaps helping exceed its guidance, current and future quarters will be enhanced by a comprehensive marketing campaign, a strengthened balance sheet, and its integration into Amazon Marketplace. Expect those initiatives to gain revenue-generating traction in Q3 and Q4.
Further, coming off its successful IPO last quarter, DBGI has tools in its arsenal to drive top-line growth sooner rather than later. Better yet, their responsible capital structure puts them in an excellent position to continue their strategy to find and execute on its accretive acquisition initiatives. For investors pre and post-IPO, the moves made by management during the past three months appear to be transformational to the company. Moreover, they are accelerating its growth. That was happening even before this morning’s announcement.
Last month, DBGI noted that DSTLD inventories are building to meet a considerable increase in demand. And its Bailey 44 brand is following suit, also seeing an acceleration of wholesale booking orders ahead of the Fall season. Notably, DBGI added another bullish comment, saying that Bailey 44 is nearing wholesale order levels that compare favorably to pre-COVID levels. Hence, with at least four brands contributing to a surging revenue stream combined with a normalizing market, the logical expectation is for shares to move higher in tandem. Chances are they will.
Know this too, DBGI’s digitally-focused sales model is intending to maximize every dollar of revenue earned. They can do that by streamlining their sales channels and controlling the manufacturing process from sourcing to end-sale. Thus, every dollar in sales has substantially more impact than traditional apparel retailers with very slim operating margins.
Moreover, DBGI is positioning itself to be a leading player in the shift from traditional retail. And while small compared to brick and mortar competitors like Macy’s (NYSE: M), the clear advantage of DBGI revenues is that they contribute to a business model designed to be profitable from the start. Most brick-and-mortar companies can’t make the same claim. And some are shedding assets to stay alive.
For example, Naked Brands (NASDAQ: NAKD) recently announced its divestiture of Bendon Ltd. to rid itself of the costs related to operating a retail store location. Bendon, by the way, is no small company. But despite its massive sales, it had $56 million in accumulated operating losses since 2017. It shows that not all revenues are created equal. Also, with its traditional sales model apparently a drag on NAKD, they dumped it.
That’s happening throughout the sector. So much so that malls may soon become charging stations for electric vehicles. That’s no exaggeration, either. Mall REITs are already considering how to manage their abandoned properties. Thus, DBGI may be on point when they say its digital business model is the future of retail. If so, expect quality revenues to hit its books.
Profiting On A Retail Rebound
And those revenues may surge heading into the back half of 2021, with apparel sector analysts expecting consumers to drive retail apparel sales substantially higher in Q3 and Q4. And with stimulus cash combined with the roughly 18 months of logistical headwinds easing, they may be right to expect a perfect storm of opportunity to those positioned to benefit from massive dollars coming off the sidelines. DBGI is. Moreover, it’s reporting of $1 million in revenues last quarter should be considered more than impressive in the face of massive economic headwinds. Other peer competitors didn’t fare near as well.
And with its Q2 now history, and with an economy expanding quickly, fueled with pricing power, expect DBGI’s four brands to hit the fall fashion season with momentum. Further, consider its $1 million Q2 as a starting point for much better and bigger things to come during the back half of this year. As DBGI noted, it’s proper to consider DBGI as a pre and post-IPO company, with the latter now leveraging a $17.5 million credit line to create a powerhouse brand portfolio.
Indeed, that funding puts its acquisition strategy into high gear, which DBGI has said from the start is a huge part of its corporate strategy. Also, keep in mind DBGI will be frugal in its mission, saying they carefully screen acquisition candidates to meet specific criteria, including having accretive synergies and being socially conscious in its manufacturing and marketing practices. Further, the company prefers its brands to sell on both the retail and wholesale sides of the sale. Its wholesale model hopes to feed the expected market frenzy with inspiring apparel that targets consumers appreciating its stylish and Eco-friendly fashions.
Hence, with a well-designed, active, and accretive business model, the rally this morning is more than justified. They completed a substantial acquisition and secured a massive line of credit. Further, its Bailey 44 and DSTLD brands are selling into hot demand, and DBGI is guiding for additional near-term acquisitions to add to its already impressive brand portfolio. Thus, on a valuation basis alone, expect the trend higher to continue. And with only about 11.3 million shares outstanding as of its latest filing, the stock has shown that when demand for shares percolates, its shares can fly.
Keep an eye on DBGI. This growth story is only just beginning.
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