Digital Brands Group, Inc. (DBGI) offers a collection of luxury lifestyle and digitally native vertical brands through its websites, as well as through its wholesale channels. The company made its Nasdaq debut in May 2021 and its shares have gained 61% over the past month. Its accelerated shipment of Bailey 44 products to wholesale accounts, along with the optimism surrounding its Amazon marketing strategy, which it will be rolling out mid-July onward, bode well for the stock.

However, the stock is currently trading 42.4% below its $8.80 all-time high.

Although the company’s intention to acquire Stateside could boost its revenue and operating results in the near term, it expects the second quarter results to be adversely affected by the factors that impacted its first quarter performance. In addition, DBGI’s negative profit margin and high losses in a competitive e-commerce landscape could  cloud its growth prospects.

Here is what we think could influence DBGI’s performance in the coming months:

Strategic Acquisition

Last month, DBGI signed a non-binding letter of intent to acquire Stateside to accelerate its growth strategy and boost its cash flow. The company believes that Stateside’s direct-to-consumer and marketing expertise should help expand its brand portfolio and enhance its cross-marketing strategy. Also, as part of DBGI’s IPO, it completed the acquisition of Harper & Jones in exchange for both stock and cash to further extend its market reach.

Channel Expansion

On June 24, DBGI announced the expansion of its e-commerce channel by launching  selected  brands on Amazon.com, Inc.’s (AMZN) platform this fall. This expansion could significantly bolster its customer reach and brand awareness. Given that the online shopping trend is expected to persist even in the post-pandemic era, the expansion could promote sales and boost its customer acquisition capabilities.

Inadequate Financials

DBGI’s net revenue came in at $408,000 in the first quarter of March 31, 2021, versus $2.6 million in the year-ago quarter. It reported a $207,537 gross loss, compared to a $1.35 million gross profit in the first quarter of 2020. Furthermore, its net loss amounted to $3.02 million, and loss from operations rose 48.9% year-over-year to $2.35 million. Also, the company’s loss per share came in at $4.55 for the quarter, compared to $2.87 in the prior-year period.

Weak Profitability

DBGI’s  trailing-12-month gross profit margin and EBITDA margin are negative 32.8% and 269.8%, respectively. Its  ROA, ROTC, and levered free cash flow margins are negative 73.3%, 189.2% and 0.9%, respectively. And its 0.6%  asset turnover ratio is 39.3% lower than the 1% industry average.

POWR Ratings Reflect Uncertainty

DBGI has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DBGI has a C grade for Quality. This grade is in sync with the company’s  weak profitability.

Moreover, the company has a Stability grade of D, indicating that it is more volatile than its  peers.

In terms of Momentum Grade, DBGI has an A. This is in sync with its price returns over the past month.

In addition to the grades we’ve highlighted, one can check out additional DBGI ratings for Sentiment, Growth, and Value here. DBGI is ranked #28 of 40 stocks in the B-rated Specialty Retailers industry.

Click here to view the top-rated stocks in the Specialty Retailers industry.

Bottom Line

A strategic marketing and advertising plan on AMZN’s platform, coupled with DBGI’s post-IPO acquisitions, could position the company  to improve its balance sheet. However, its weak financials and negative profit margin, in a highly  competitive e-commerce market, have added uncertainties to the company’s growth prospects. So, we think investors should wait for its financials to stabilize before betting on the stock.

Click here to checkout our Retail Industry Report for 2021

DBGI shares fell $0.22 (-4.34%) in premarket trading Monday. Year-to-date, DBGI has gained 44.12%, versus a 17.22% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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