Though investors can look to market trends to predict activity happening around certain firms and sectors, market valuations are a flawed system that often misrepresent the potential of a company. While this can be considered an imperfection in the system, it can also present golden opportunities for watchful investors to swoop in on a low-valued stock with great promise for growth. This seems to be precisely the case with Digital Brands Group, Inc. (NASDAQ: DBGI). Fresh off a record-breaking year and with a robust pipeline at its disposal, Digital Brands looks to be positioned for a breakout year in 2022.
Digital Brands ended FY 2021 strong, and is launching into 2022 with the same vigor. The company posted $2.2 million in revenues at the end of Q3 last year, marking about a 75% increase from the previous quarter, and is estimated to have followed with revenues even higher in Q4. This brings the total expected FY 2021 revenues up 44% from their 2020 estimates, reaching a potential total of about $7.6 million. Especially when considering the constraints that businesses have faced with supply chain difficulties in the past year, this is a remarkable outcome for the company. However, what Digital Brands has lined up for FY 2022 could blow their previous year out of the water.
In a recent announcement, Digital Brands reported a year-over-year increase of 776% in E-commerce revenue growth in January and February of 2022. Given its direct-to-consumer model, this is a tremendous success for the company, and this growth doesn’t show signs of slowing. Additionally, the company has reported that Q1 2022 wholesale bookings from last quarter increased 125% from last year’s value, with bookings still open for this number to climb even further. This is only one reason why the company’s guidance for FY 2022 puts the company’s revenues between $37.5 million and $42.5 million, representing a 350% year-over-year increase from 2021.
However, Digital Brands isn’t just growing revenues through the channels it already has. Following two successful acquisitions last year, the company has announced yet another acquisition for FY 2022. Digital Brands is looking to leverage the revenue-generating prospects of Sundry, a highly profitable women’s lifestyle brand, alongside its other brands to enhance its repertoire and efficiently boost profits. With low projected costs from shared expenses, the additional upsides of this acquisition, including greater brand awareness and customer retention, look to be well within reach for Digital Brands. What’s more, the acquisition process is already well underway, meaning Digital Brands’ valuation may be in for a shock to the upside sooner than expected.
Adapting to a Changing Commerce Landscape
When looking at Digital Brands’ numbers, the company appears to have made some very impressive moves over the last several quarters. This is absolutely true, but it may even be easy to underestimate the promise that Digital Brands showed by achieving these milestones. 2021 was far from normal, and supply chain disruptions hit fashion retail companies harder than ever. So, to see consistent increases in revenues as well as several successful acquisitions in the midst of such market turbulence makes Digital Brands’ track record all the more impressive.
As a result of Digital Brands’ successful navigation of last year’s market conditions, the company enjoys a distinct advantage coming in to 2022. Though 2021 posed many logistical obstacles to fashion retailers, it also represented a landmark year for online shopping. Digital Brands recognized this shift in the way business is done early and has been able to carve a solid position for itself in a growing market, as evidenced by its almost eightfold increase in E-commerce revenues. This report came shortly after the company’s implementation of online payments through Google Pay. Not only is Google Pay used by more than 150 million people monthly in 40 countries, but it also aligns strongly with Digital Brands’ target demographic of consumers between 18 and 34 years old. In fact, the company has continued on this trend of creating new channels for revenue, announcing last November that it would also accept payment in the form of cryptocurrencies across all brands.
Digital Brands’ forward-thinking and savvy moves have earned them a fantastic starting point for FY 2022. Even through periods of notoriously difficult supply chain disruptions, the company has not only increased revenue through its established brands, but has also completed two acquisitions with another approaching quickly. When added to the company’s recent successes in its direct-to-consumer and E-commerce platforms, Digital Brands gives ample reason to believe its projected 350% year-over-year growth for 2022.
Leveraging Explosive Growth to Double Profit Margins
An additional piece of information to keep in mind when looking over Digital Brands’ numbers is that the company only included revenues from its recent acquisitions after establishing ownership, leading to a potentially deflated picture of the revenues coming from the recently acquired brands compared to their actual value. Investors can expect to see more promising surprises like these as Digital Brands keeps making acquisitions, and with another already undergoing negotiations, this may happen sooner than expected.
That said, Digital Brands isn’t just focusing on leveraging its recently acquired brands. The company’s core brands are also experiencing breakout growth, and that’s with Digital Brands spending 94% under budget on marketing. One of the company’s flagship clothing brands, Bailey 44, reported a surge of 379% near the end of 2021, accompanied by a 52% increase in revenues from DSTLD. Again, these gains were achieved spending only $30,000 of the budgeted $500,000 on marketing, leading to a tremendous ROI for the company’s campaigns.
In addition to fantastic performance from the company’s core brands, Digital Brands almost doubled its gross profit margin to 55.9% last year. Much of this improvement came from the company’s strategic acquisitions, which leveraged shared costs between marketing and production across brands to assemble a repertoire better than the sum of its parts. This is in addition to the fact that the company achieved tremendous revenue increases using only 6% of their marketing budget. Digital Brands expects this margin to climb even higher heading into the new year, pointing to potentially EBITDA positive books as soon as this quarter.
Assembling an Optimized Brand Portfolio
Digital Brands’ performance over the last several quarters comes at no surprise when looking over the company’s brand portfolio. With significant experience in luxury lifestyle and fashion brands, the company’s team has put together a perfect portfolio of brands to draw in and retain a diverse base of consumers. The company’s brands don’t just capitalize on surging demand for new fashion, but they fulfill that demand with responsible and forward-thinking products, maximizing their appeal to modern Millennial and Gen-Z consumers.
This raises the question, why is Digital Brands’ valuation resting at around $1.58? Looking toward the IPO’s of comparable brands like a.k.a Brands (NYSE: AKA) and Solo Brands (NYSE: DTC), applying the same revenue multiples indicates that Digital Brands could very well be an $11 stock. As a matter of fact, Digital Brands even appears better poised for growth than some comparable brands with higher valuations. When reviewing the evidence, it seems as though DBGI’s low valuation represents a disconnect that may resolve itself sooner rather than later.
To give some examples, DBGI currently enjoys a healthier balance sheet and capital structure than AKA’s. The company is also free of legacy issues that may obstruct DTC’s growth in coming quarters. However, in spite of these facts, AKA and DTC are trading close to their IPO’s, while Digital Brands is not. This could be because the company didn’t go to the big banks for their IPO, or perhaps the company’s current valuation is a fluke. Either way, Digital Brands appears to be well prepared to generate value for their investors sooner than expected.
Digital Brands has posted a series of landmark quarters: the company completed two acquisitions last year with another on the books for 2022, and revenues through its E-commerce and wholesale channels are soaring. And yet, DBGI is currently trading at only $1.58 compared to its high of $8.80. Given how strong the evidence is that Digital Brands could have a breakout year in 2022, savvy investors should keep a close eye on the company’s valuation as its current levels may present an opportunity that won’t last long.
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