Digital Brands Group, Inc. (NASDAQ: DBGI) stock soared by more than 53% after raising its fiscal 2022 revenue guidance. And that guidance increase wasn't a token number, either. It was an exponential increase, with a pre-market release on Tuesday indicating DBGI expects to post FY revenues between $37.5 million and $42.5 million, an increase of 350% from previously published 2021 revenue expectations. Better still, those revenues are expected to meet positive EBITDA in FY 2022 as it leverages its shared services platform. Hence, DBGI stock has been put in play.
The jump in revenues should be no surprise to investors following the story. And despite recent weakness in the stock, its growth story proposition hasn't wavered. In fact, that recent weakness may have been the last opportunity to catch prices at those former levels, especially with guidance showing the DBGI growth story to be well intact. Moreover, the 350% increase in revenue expectations comes despite continued pandemic-related weakness. Therefore, the future can be substantially more potent than even its own bullish forecast suggests. Companies do have a way of beating guidance.
Notably, the projected increase of 350% in its year-over-year revenue growth does not reflect potential additional acquisitions, a mission expected to accelerate in 2021-22. Even better, those acquisitions are made with accretive purpose, contributing to DBGI's expectation to achieve cash flow EBITDA in 2022 by leveraging value from its shared services platform. If so, it's a remarkable achievement for a company that only became public in the middle of 2021.
Of course, it's the brands attracting attention. There, DSTLD, Bailey 44, Harper & Jones, and Stateside are leading the surge in revenues. An S-1 filing, however, said to expect company growth to continue through acquisitions potentially before the end of 2021.
Such moves should keep the momentum going. Better yet, the IPO of a.k.a Brands (NYSE: AKA) last week adds some valuation context- and it's entirely bullish to the DBGI value proposition.
Bullish Thesis Enhanced By Massive Revenue Guidance Increase
Notably, that value proposition was already compelling. But it just got better. And the $110 million IPO by a.k.a. Brands shows just how powerful DBGI's brand portfolio can be when adequately recognized.
In fact, DBGI stock should have run higher on that news alone. After all, the companies are an apples-to-apples comparison. And here's why AKA's successful IPO matters.
From its filings, a.k.a. Brands said that revenues increased 111% YoY to $215.9 million in 2020 and 167% YoY to $218.0 million in the first six months of 2021. That translated to a jump in net income of 81% over the prior period. That growth bodes well as a barometer for the sector. Taking things a step further in the DBGI comparison, using forward looking revenue expectations of $436M and adding debt and subtracting cash, they are trading at a roughly 5X revenues multiple. That's excellent news for DBGI. Here's why:
Using the same calculations and modeling for the guidance midpoint of $40M, and assuming 17 million shares outstanding after the Stateside acquisition with a 5X multiple, a better representation of DBGI share value should rest at roughly $11.00 per share. That's about 214% 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. Currently, 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 to DBGI after noting the similar business model and what investors were willing to pay to be part of the AKA story.
Exposing The Value In DBGI
That's important to note, keeping in mind that DBGI has a similar strategy to a.k.a. Brands by acquiring consumer apparel brands focusing on a direct-to-consumer business model. And AKA is doing its part to prove the value in the space, with 2020 orders growing by 53%, accompanied by an average increase in order size of 14% compared to 2019.
And like DBGI, its brands saw a spike in consumer interest, and more importantly, saw a more than 70% increase through digital platforms. That trend bodes well for DBGI. In fact, it shows that DBGI is indeed in the right markets at the right time, especially with the pandemic creating a massive shift in consumer purchasing behavior away from malls and departmental stores. Online sales are surging.
Estimates for global online apparel, footwear, and accessories market size, valued at about $300 billion in 2019, will likely reach $546 billion in value by 2025. And that growth should extend higher as technology makes digital purchasing more effortless and accessible. Indeed, the markets are strong and getting stronger.
And DBGI brands are following suit.
Growth Into EOY 2021
In August, 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. 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.
Also notable, DBGI is positioning itself to be a leading player in the shift from traditional retail. And that's an important distinction compared to brick and mortar competitors like Macy's (NYSE: M), that struggle with extraordinarily low margins as small as 2% in some cases. Thus, the advantage of DBGI revenues is that they contribute to a business model designed to be profitable from the start.
Moreover, with the company expected to turn EBITDA positive in 2022, 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. There's more to support the value proposition.
Retail Rebound Adds To DBGI Value Proposition
Sector revenues are expected to surge as well, with analysts expecting consumers to drive retail apparel sales substantially higher in Q3 and Q4. Couple that momentum with an already growing DBGI revenue stream and a side-by-side valuation comparison to AKA, DBGI is better positioned than ever in its short history to break substantially higher in the coming two quarters.
Further, analysts covering AKA may have a hard time ignoring the opportunity in play at DBGI, which could be a further catalyst to its share price. They, too, need comparisons to validate coverage.
Here's the thing to remember. DBGI is a tale of two companies- pre-and post-IPO. Consider DBGI the vehicle of value within the latter. Also, keep in mind that while DBGI is searching for accretive acquisitions, they are likely to remain strategically frugal, saying they are only interested in companies that meet specific criteria, including having accretive synergies and being socially conscious in its manufacturing and marketing practices.
Further, the company is committed to brands that sell on both the retail and wholesale sides of the sale. Thus, DBGI targets the entire sales channel opportunity. Even better, by controlling the process from start to finish, they maximize the contribution to the bottom line.
Hence, warp-speed growth and maximizing revenues make DBGI attractive on multiple levels. And their updated guidance, along with an AKA comparison, indicates that the stock is considerably undervalued at current levels. And that's inclusive of the 53% spike on Tuesday. On a valuation basis alone, before future acquisitions, 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 stock can fly. Evidence of that happened yesterday. Still, considering their guidance, it's likely the start of a substantially larger rally. Deservedly so.
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