Top Deal: An Update on a Fashionable Favorite

Key Stats:

Summary

The Digital Brands Group team has been selected as a “Top Deal” by KingsCrowd. This distinction is reserved for deals selected into the top 10% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology please reach out to hello@kingscrowd.com.

Problem

Fashion is intrinsic to society, and it is highly competitive as an industry. Brands which were once the center of public attention are now struggling or have failed entirely. It was thought that this struggle originated from the inherent challenges of being brick-and-mortar enterprises, challenges such as high costs and the need for significant investment in infrastructure. Additionally, brick-and-mortar fashion must contend with an inflexible business model that makes it difficult to compete with many direct-to-consumer brands. 

The move towards a digital fashion world was thought to be the solution for many of these problems. However, many existing brands have been unable to to fully transition to e-commerce because they lack the resources necessary for such a change. Issues of supply chain ownership and having the proper infrastructure to handle packaging, shipping, and returns are common woes of the would-be digital fashion brand.

Solution

Regular readers of KingsCrowd may remember Digital Brands Group, as we have covered the company before. In that coverage, we have regularly rated it a Top Deal because of the opportunities afforded to it. Its business model, after all, is impressive. Already, the company owns four different fashion brands: DSTLD, ACE Studios, Bailey 44, and Ali & Jay. The business is also in the process of acquiring four additional brands: Jack Georges, Harper & Jones, Reigning Champ, and Wings + Horns. The firm’s model is truly multi-faceted and does not hang on any one thing.

The first facet we need to discuss is the company’s multi-brand strategy. Management has been busy buying and growing small but attractive brands. Though an acquisition approach can be costly, the goal for the firm is clear. They intend to create what they call a ‘closet share,’ which is an assemblage of popular brands that offer clothing that provides head-to-toe looks and personalized styles. This approach addresses one of the key challenges the company has pointed out about the industry. Digital native brands, they believe, cannot be considered stand-alone companies. They are not scalable and are not a comprehensive business model. They often rely on third-parties, like manufacturers and distributors, adding costs to the value chain and eliminating many of the advantages that digital native brands offer.

Having a closet share, management says, will open the door to more value for the firm and its shareholders. Creating a diversified portfolio encourages users to come back to its selling portal. It also helps the firm to eliminate duplicative costs like overhead and to streamline operations. Along this line, one of management’s objectives is to scale up by acquiring necessary steps in its supply chain. Having a stronger investment in its supply chain will help the firm control costs and expand margins. These benefits only increase as the company adds more successful brands to its name.

Even though making some of the same steps that brick-and-mortar players make is a key part of management’s strategy, make no mistake. The company still intends to remain a digital-first provider of DTC fashion products. Their primary means of doing this is their Denim.la platform where consumers can search for and buy the business’s brands through the portal. However, their digital initiative doesn’t stop there. The company has also designed the system to collect data. It then leverages that information and personalizes customer cohorts in order to generate targeted content for their users. This personlization not only helps to retain customers, it helps to draw them in.

If you were to look at the financial results for Digital Brands Group over its 2017 and 2018 fiscal years, you would probably be unimpressed. In 2017, its revenue totaled $3.85 million. This amount declined by 1.9% in 2018, with revenue totaling $3.78 million. Over the same timeframe, the company’s net loss expanded from $3.29 million to $4.73 million. Its operating cash outflows followed a similar track, rising from $3.46 million to $4.17 million.

These results were less-than-stellar. However, in 2019, the picture changed rather drastically. Though official financial results are not offered up, the company said that revenue in 2019 surged to $30.79 million. The firm expects that the four brands it is acquiring will be even better than existing operations. Revenue for those brands last year totaled $32.19 million. If all goes according to the company’s plans, by 2022 revenue from its operations will grow to more than $100 million per annum.

A Growing Market

Though the fashion space is in a constant state of flux, the industry is large and continues growing on the whole. Old, outworn brands of yesteryear are replaced by new, upcoming firms. According to one source, the global fashion e-commerce market this year should be worth around $696 billion alone. The expectation is for an annualized growth rate of 12.2% moving forward, through at least 2024. At that point, it should be about $991.64 billion in size.

Not all sources agree on the market opportunity’s size though. A different source estimated that the industry was worth about $606 billion for the current fiscal year. That source estimates that it will grow at a rate of about 10.3% per annum. By 2022, the market there is forecasted to hit $712.95 billion. Breaking up the data, you find some interesting things. The clothing segment for it, for instance, stands at $403 billion per year, and it’s growing at a clip of 8.6% annually. Only about 2.2% of this growth per year is chalked up to ARPU rising (online shoppers buying more). Also, growth in the fashion industry appears to be robust when you look at most major regions. In the US, it’s growing at 8.8% per year. In Europe, this figure is 8.7%. In China, on the other hand, it’s 14.1%. Other interesting market segments include shoes, worth $117 billion, and bags & accessories, worth $85 billion.

Another way to look at this space is through consumer behavior as opposed to just dollars. One source indicates that 43% of online purchases are influenced by personalized recommendations or promotions. This figure makes sense when you consider that 75% of consumers who engage in fashion e-commerce prefer receiving personalized messaging, offers, and experiences as opposed to generic alternatives. Both of these data points support the idea of a digital-first platform with a DTC component to it. Add in the diverse brands, and the supply chain aspirations that Digital Brands Group has, and its business model makes for a great deal of sense.

It is also important to keep in mind that digital shopping is not tied to any particular country but is occurring in many nations globally. In the UK, Germany, and South Korea, 67%, 76%, and 77%, respectively, of people have purchased fashion products online.  In India and China, meanwhile, those figures are virtually the same at 68% each.

Terms of the Deal

In order to continue growing, the management team at Digital Brands Group is looking to raise up to another $1.07 million from outside investors. The company is conducting this raise by issuing preferred stock priced at $0.41 per unit. To participate in this raise, investors must individually contribute at least $100. As a special sweetener, the company is offering a substantial discount to its valuation for the first $250,000 contributed to its raise. Investors in this tranche will be included at a pre-money valuation of $36.7 million. Once that threshold is passed, the pre-money valuation for the business will be elevated to $52.8 million. As of this writing, Digital Brands Group has $126,872 committed to its raise, which is greater than the $100,000 minimum threshold the company needs to close its round.

An Eye on Management

At this time, there are three core members to the Digital Brands Group team. The first of these is its sole founder and CEO, Hil Davis. Prior to his time running Digital Brands Group, Davis was the CEO of BeautyKind, a digital beauty retailer with a charitable component to it. He was also the founder and CEO of J. Hilburn, a fashion firm that he grew from $0 in revenue to $55 million in six years. 

Next in line at the company is Laura Dowling, the firm’s CMO. Before working at Digital Brands Group, Dowling was employed by Coach as the Divisional VP of Marketing and PR for the North America operations. Prior to that, she was employed as the US Marketing and PR Director for Harvey Winston. Her work experience before that was as a Director of Wholesale Marketing at Polo Ralph Lauren. 

The last individual of note is Reid Yeoman, the CFO and COO of Digital Brands Group. He previously served as a CFO at Hurley. Before that, his role was as the Finance Manager, and then Finance Director, at Nike. All three of these members have strong fashion industry experience under their belts.

Rating

After a careful review of the data, we have decided to rate Digital Brands Group, once again, as a Top Deal. Although at first glance, the company’s valuation seems absurd, when you look at how revenue surged in 2019, the amount becomes much more understandable. Add in the additional sales the firm is set to receive from its four acquisitions, and you have a serious player in the fashion space. Also encouraging is the company’s quality leadership team, particularly its founder and CEO. His role in fashion over the years is impeccable. There are, of course, other factors at play in our rating for the firm. Although fashion is a tough business, the firm’s model at dealing with the issues plaguing the industry makes sense. It also helps that the industry the company is playing in is large and growing at a nice clip.

There are, of course, some risks that need to be mentioned. The firm needs to ensure that it can go on to generate profits and positive cash flows. These will prove paramount to its success. Another challenge is the industry itself. While the market is growing, fashion is a fickle space and what’s hot today can easily be dead tomorrow. Keeping a large and diverse portfolio of brands will significantly mitigate this risk, but it won’t eliminate it altogether. Should several brands at once fall out of favor with consumers, it could spell a great deal of pain for the business and its investors. Having said all of this, we view these risks as fairly small in light of the positives the firm touts.