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Digital Brands (DBGI) - Going Private - A Failure to Read

Digital Brands (DBGI) - Going Private - A Failure to Read
Written by
Michael Sheikh
Published on
March 25, 2023
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Digital Brand Inc (NASDAQ: DBGI) has been beaten and battered to an unthinkable market cap by the shorts and represents one of the cheapest and most undervalued NASDAQ stocks. It sports a $6.5 million market cap and is expected to be profitable with $50 million plus in revenues this year. Frustrated with the market reaction to success, the CEO, Hil Davis is taking the company private and investors are simply not heeding his warning. The stock has the potential to eclipse the move MetaMaterials (NASDAQ: MMAT) pfd shares MMTLP made late last year on an epic short squeeze. Will investors continue to have poor eyesight with respect to this undervalued darling.

Serial Dilution Stigma

How does a successful brand building company lose over 90% of its value? Over the past couple of years, the CEO has executed a number of financings that went to finance inventory and brand acquisitions due to the underlying strength of their business model and growth rate. As a result of those dilutive financings under his watch he has been branded as a serial diluter and has an entourage of shorts following his every move, making each successive financing harder. That came to head last year after DBGI established a Purchase Order financing facility. This meant that Digital Brands no longer needed to raise money to finance production. In fact, they can utilize that financing facility for any new brands that are brought under the umbrella. These smaller brands are not of the scale to be able to qualify for this type of financing on their own so it's a value add for them by allowing the brands to grow unimpeded by capital.

Private Equity Needs Scale

For the DBGI business model to succeed, they not only need brands, but they need scale. The Sundry acquisition pushes them past the $50 million revenue mark that makes them an acquisition target in the Private Equity space because they need scale. While the company was growing to reach a critical mass it needed financing. The financing came from wall street, but it came on the backs of retail investors. HC Wainwright did a highly dilutive deal but got close to the $10 million the company needed to finish off the Sundry acquisition. It was a must close deal for the company because it represented the integration of yet another brand and allowed the company to demonstrate the leverage of its marketing platform that dramatically lowers the customer acquisition costs.

Private Equity Banker Announcement - Trigger

While this is all nice back story the real opportunity comes in the going private announcement which could explode this low floater to at least $5.25 where a number of warrants sit. Then the sky is the limit. The company needs equity to continue their growth, and since shareholders aren’t cooperating by buying DBGI at these bargain basement prices, the company is on the verge of hiring a Private Equity Investment banker that will take them private and then profit by selling the whole or the pieces. In the state of the union call the CEO explained how they were connected to the private equity firm. Digital Brands was trying to buy one of their brands so as an organization they understand how to fairly value a brand and understand that once the cost structure is under control incremental revenues become extremely important to the bottom line. He commented that PE firm saw how 3 of the brands are worth more than the current market cap of the company. He also pointed out that they also understand that every month they increase the revenues the valuation moves higher creating that sense of urgency to strike a deal. The tweets from March 7th were largely ignored where the CEO spells out that an official announcement is in the works. It seems the only way to get shareholders attention is a tender offer but those that know how to read might do very well understanding the current price is just a short and distort ploy.

State of Union Web Conference - Growth Metrics Ignored

DBGI’s State of the Union Call was on March 7, 2023. Most of the highlights were aired in a twitter barrage by the CEO, Hil David. Sundry was a $30 million revenue acquisition and with the tweaks they are planning it is not hard to imagine double or triple the revenue growth. Sundry integration was completed March 15th and the end result is $165K in monthly savings from the acquisition. That's roughly $2.0 million annually and Sundry was already making a profit. The thing that CEO Davis was hammering to investors is that they are going to be profitable in July. He went through the business model and talked about a number of growth initiatives.

Economies of Scale & Cost Savings

There are a number of bottom line savings and that is the primary premise of their business model. The company is all about lowering the customer acquisition cost and leveraging the value of the brand.Their overhead cost structure is now fixed so much more falls to the bottom line.

“These wholesale channels require little to no incremental investment to support this growth. Therefore the flow through is almost 100% from this incremental revenue.” - Hil Davis, CEO Digital Brands Inc.

The purchase order facility which gets them financing is another key part of their plan that's getting little credit from investors. The company also lowered their price point which expands the number of boutiques they can be shown in from 500 to 1500. The lower price point also expands the number of department stores from 2 - 6. Sundry is also going on the Bailey’s shop platform which will bring in more sales and cross selling of brands. More brands on the platform mean more revenue over multiple distribution channels. All these efforts increase revenue.

Financial Analysis

The company telegraphed a break even quarter by July but their assumptions ruled out any revenue growth from their initiatives which were showing huge returns in just the past weeks. They went out of their way to say the EBITDA assumes no increase in e-commerce revenue. They are clearly positioning the company for a massive beat. The cost structure and elimination of redundancies is expected to result in almost $2.0 million in cost savings. The company also has $1.0 million in licensing revenue for the Digital Brands names but is expected to get an additional $1.5 million from licensing of Sundry. That roughly $2.5million in licensing money yearly. In 3 years or less the licensing deals are worth more than the entire market cap of the company.

Investment Summary

DBGI is getting a buyout offer. The timing of which is not clear, but surely before July when they go cash flow positive. DBGI is perhaps one of the most undervalued stocks on the NASDAQ which is why it's going private. The funny thing about these going private plays is that once they decide they are going private and not do any financing in the public realm, that is when the public market value catches up. In the CEO’s state of the union conference call he was quite serious about going private. The combined company sales which sat at $50 million looks like they are going to at least double if not triple when you look at the revenue expansion initiatives. Stripping out the existing cash, investors need to ask what a private equity firm would pay for a company on a $100 million run rate and profitable. There's a sense of complacency surrounding DBGI, investors think it will do nothing for the foreseeable future. They think the CEO is a serial diluter. These investors simply can't read the tweets that the company is on a go-private trajectory and the purchase price is a 10X multiple from here. A massive short squeeze that makes MMTLP look like child’s play is brewing.


Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.

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