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Digital Brands Group, Inc. (DBGI)·Q2 2023 Earnings Summary

Executive Summary

  • Q2 2023 marked a visible inflection: revenue grew 69.6% y/y to $4.49M on acquisition-driven scale (Sundry) and operating leverage; diluted EPS swung to $0.38 from a loss of $26.47 a year ago, aided by a large non-cash gain from the change in fair value of contingent consideration that lifted operating income to $9.0M .
  • Management guided qualitatively that Q3 and Q4 revenues will be “meaningfully higher” than Q2 on strong wholesale bookings and improving e-commerce; gross margin is expected to continue to expand from Q2’s ~52% level .
  • Cash inflection remains the focal catalyst: the company reiterated it is on track to generate internal free cash flow beginning in October (timed to the end of MCA payments), a narrative the team has emphasized since April; management also expects licensing income and two new channels (proprietary affiliate program, multi-brand retail store) to augment 2H revenue and cash flow .
  • S&P Global consensus for Q2 2023 EPS and revenue was not available; consequently, beat/miss versus Street cannot be assessed (consensus unavailable via S&P Global for this period).

What Went Well and What Went Wrong

What Went Well

  • Revenue and margin inflection: Net revenue +69.6% y/y to $4.49M; gross profit +40.4% to $2.34M; gross margin improved to ~52% from 42% y/y, reflecting mix and Sundry scale .
  • Operating leverage: G&A down 4% y/y to $4.1M despite higher sales; Sales & Marketing down 20.1% y/y to $1.1M, showcasing cost control as revenue scaled .
  • Forward momentum: Management expects Q3/Q4 revenue to be “meaningfully higher” than Q2 on already-booked wholesale orders and accelerating e-commerce trends; affiliate program waitlist and first Bailey 44 license check reinforce incremental drivers .
    • Quote: “Our third quarter and fourth quarter revenues will be meaningfully higher than this quarter… we will continue to show a higher level of cost savings… We are only in the first inning of this structural shift” .

What Went Wrong

  • Underlying profitability quality: Q2 operating income of $9.0M was boosted by a non-cash $12.10M favorable change in the fair value of contingent consideration; normalizing for this, the core P&L remains under pressure .
  • Liquidity and leverage: Cash was $0.34M at 6/30; current liabilities remained heavy ($22.65M), including debt and accrued interest; while factoring and MCA runoff are tailwinds, near-term liquidity is tight .
  • Discontinued operations drag: Loss from discontinued operations was $(2.89)M in Q2, muting the continuing ops improvement .

Financial Results

Income Statement Trends (oldest → newest)

MetricQ4 2022Q1 2023Q2 2023
Revenue ($USD Millions)$3.38 $5.10 $4.49
Gross Profit ($USD Millions)$0.64 $2.40 $2.34
Gross Margin (%)n/a47.9% ~52%
Operating Income ($USD Millions)$(13.26) $(3.60) $9.02
Net Income ($USD Millions)$(15.78) $(6.20) $5.04
Diluted EPS ($)$(20.46) $(1.08) $0.38

Notes:

  • Q2 operating income benefitted from a $(12.10)M line “Change in fair value of contingent consideration,” which turned total operating expenses negative and drove the positive swing .

Year-over-Year (Q2 2023 vs Q2 2022)

MetricQ2 2022Q2 2023Y/Y Δ
Revenue ($USD Millions)$2.65 $4.49 +69.6%
Gross Profit ($USD Millions)$1.11 $2.34 +40.4%
Diluted EPS ($)$(26.47) $0.38 Swing to profit

Segment/KPIs:

  • Segment/brand revenue: Not disclosed in the press materials or transcript. Portfolio performance commentary emphasized Sundry scale, Bailey 44 wholesale relaunch, and licensing, but no segment tables provided .
  • Operational KPIs cited qualitatively: wholesale bookings visibility for Q3/Q4; affiliate program waitlist; e-commerce acceleration; Bailey 44 wholesale reboot; first licensing check .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueQ3 & Q4 2023Not previously quantified“Revenues will be meaningfully higher than [Q2]” based on wholesale bookings and e-com trends New qualitative outlook
Gross Margin2H 2023Margin improving into fall (Q1 commentary) Expect gross margin to continue to increase from ~52% in Q2 Maintained trajectory
Internal Free Cash FlowFrom October 2023Expect ~$500k/month starting in October via MCA runoff (April release) and reiterated (Q4 call) “On track to generate internal free cash flow in October” (weekly basis) Maintained timing; reiterated
New ChannelsFall 2023 launchSoft launch planned for affiliate; pursuing multi-brand retail store strategy (Q1 call) Affiliate program capped with waitlist; multi-brand retail store launching in fall Execution progressing
Licensing Income2H 2023Discussed opportunity (Q4/Q1) First Bailey 44 license check arriving “next week”; exploring another license Visibility improved

Earnings Call Themes & Trends

TopicQ4 2022 (Prev-2)Q1 2023 (Prev-1)Q2 2023 (Current)Trend
Working capital & factoring; MCA payoffTransition to positive working capital via factoring; MCA payoff in Oct to unlock ~$490k/month free cash flow Expect EBITDA positive and free cash flow with MCA ending; plan to reinvest or buy back shares On track to generate internal free cash flow in October (weekly basis) Improving cash profile
Gross margin trajectoryNoted reclass impacts in 2022; positioned for higher margins with scale Gross margin 47.9% in Q1, up from 33.2% y/y ~52% gross margin; management expects further increases Improving
Affiliate programMentioned as upcoming growth channel Building founding group; soft launch targeted for Aug Waitlist in place; cap on reps due to demand Scaling
Multi-brand retail storesStrategy outlined; store economics referenced Expect to use free cash flow to ramp; 50+ store vision First store to launch this fall Advancing
Wholesale bookings & Bailey 44Relaunch for fall; contribution to Q3/Q4 Bailey 44 wholesale returning; improved SKU efficiency Q3/Q4 revenues “meaningfully higher” on wholesale bookings Stronger order book
Licensing incomePotential off-price license deal discussed Continued exploration First Bailey 44 license check due next week; exploring another license Monetization starting

Management Commentary

  • “Our third quarter and fourth quarter revenues will be meaningfully higher than this quarter… we will continue to show a higher level of cost savings… We are only in the first inning of this structural shift” – CEO Hil Davis .
  • “Gross profit margins increased significantly to 52% from 42% a year ago, and we expect to continue to see an increase in our gross margin” .
  • “We are still on track to generate internal free cash flow in October and… expect this internal free cash flow to increase every quarter” .
  • “We are also excited about our two new revenue channels… our proprietary affiliate program and our multi-brand retail store… we’ve had to place a limit on the number of reps in the affiliate program and are now building a waiting list” .

Q&A Highlights

  • The published Q2 call materials contain prepared remarks and closing statements noting Q&A, but no substantive Q&A content was included in the transcript provided. No additional guidance clarifications or tone changes from Q&A were disclosed in the available document set .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2023 EPS and revenue was unavailable in our request window; therefore, we cannot assess beat/miss versus consensus for this quarter using S&P Global data. Future revisions should anchor to S&P Global once available for DBGI coverage.

Key Takeaways for Investors

  • Narrative turning point: Q2 showed meaningful top-line growth and gross margin expansion, with management pointing to an even stronger back half on booked wholesale and e-commerce momentum .
  • Cash catalyst near-term: The October pivot to internal free cash flow as MCA payments cease is the central stock narrative into 4Q, alongside working-capital benefits from factoring .
  • Quality of earnings: Q2 operating and net income benefited from non-cash contingent consideration adjustments; underlying profitability should be evaluated excluding that boost .
  • New growth vectors: Affiliate program waitlist, first licensing receipts, and initial retail store provide incremental revenue levers beyond organic wholesale and e-commerce .
  • Cost discipline: Y/Y declines in G&A and Sales & Marketing dollars against higher revenue underscore operating leverage; monitoring sustainability of leverage into Q3/Q4 is key .
  • Liquidity watch: Low quarter-end cash and sizeable current liabilities keep execution and timing of the October cash inflection critical to the equity case .
  • What to monitor next: Q3/Q4 revenue cadence vs the “meaningfully higher” bar, gross margin progression, affiliate/store ramp KPIs, and any normalized EBITDA/free cash flow disclosures to validate the structural shift .

Supporting detail:

  • Q2 2023 financials and statements (press release/8-K exhibits) .
  • Q2 2023 call transcript (prepared remarks) .
  • Prior quarters for trend: Q1 2023 call transcript ; FY22/Q4 2022 8-K and call .