Is Digital Brands Group a Buy Under $5?

Direct-to-consumer apparel seller Digital Brands Group, Inc. (DBGI), which is based in Austin, Tex., made its stock market debut on July 22, 2021, going public via the traditional initial public offering method and adding $10 million to its cash supply. The company recently launched DSTLD on Amazon Prime, while also launching its affiliate program across all its brands. Over the past month, the stock has gained 22.1% in price to close yesterday’s trading session at $3.53.

However, the stock has declined by  22.3% in price over the past three months and is currently trading 59.9% below its 52-week high of $8.80, which it hit on July 8, 2021. 

DBGI raised $5 million and $1.50 million, respectively, through the issuance of senior secured convertible promissory notes to Oasis Capital, LLC and FirstFire Global Opportunities Fund, LLC. Furthermore, ongoing labor shortages and supply chain disruption make the company’s near-term prospects uncertain.

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

Growth Initiatives

On August 31, 2021, DBGI completed its acquisition of Stateside for $10 million. Stateside is now a wholly-owned subsidiary of the company. Hil Davis, DBGI's CEO, said, “Stateside is expected to be accretive to DBG's revenue and earnings per share in both the third quarter and fiscal year of 2021. Additionally, we believe the Stateside brand will drive meaningful near and long-term shareholder value.”

Solid Management Guidance

On September 28, 2021, DBG announced its initial 2022 revenue guidance of $37.5 million to $42.5 million, representing a 350% increase from 2021 revenue expectations. In addition, the company forecasts positive EBITDA for 2022, as it leverages its shared services platform.

Top Line Growth Doesn’t Translate into Bottom Line Improvement

For the fiscal second quarter, ended June 30, 2021, DBGI’s net sales surged 51% year-over-year to $1 million. The company’s total assets increased 63.8% year-over-year to $34.01 million. However, its total operating expenses increased 591% year-over-year to $11.24 million. In comparison, its loss from operations came in at $10.84 million, representing a 472.3% year-over-year increase. Also, its net loss was  $10.70, up 371.8% year-over-year.

Poor Profitability

In terms of the trailing-12-month CAPEX/Sales, DBGI’s 0.33% is 85.4% lower than the 2.23% industry average. Likewise, its 0.59% trailing-12-month asset turnover ratio is 43.9% lower than the 1.06% industry average. And the stock’s trailing-12-month ROTC and ROTA are negative compared to the 7.70% and 6.26% respective industry averages.

Lofty Valuation

In terms of trailing-12-month EV/S, DBGI’s 16.60x is 993.6% higher than the 1.52x industry average. Its 8.66x trailing-12-month P/Sis 158.9% higher than the 3.34x industry average. Furthermore,  the stock’s 2.09x trailing-12-month P/S is 60.4% higher than the 1.30x industry average.

POWR Ratings Reflect Uncertainty

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. DBGI has a D grade for Stability, which is in sync with its 1.23  beta.

DBGI has a C grade for Value, which is in sync with its higher-than-industry valuation ratios. In addition, the stock has a C grade for Quality, which is in sync with its lower-than-industry profitability ratios.

DBGI is ranked #32 of 42 stocks in the Specialty Retailers industry. Click here to access DBGI’s ratings for Sentiment, Growth, and Momentum as well.

Bottom Line

DBGI reported disappointing earnings results in the second quarter. Also, the stock is prone to a short squeeze. Since the stock looks overvalued at the current price level, we think it could be wise to wait for a better entry point.

How Does Digital Brands (DBGI) Stack Up Against its Peers?

While DBGI has an overall POWR Rating of C, one might want to consider investing in the following Specialty Retailers stocks with an A (Strong Buy) rating: The Tile Shop Holdings, Inc. (TTSH), Canadian Tire Corporation, Limited (CDNAF), and The Cato Corporation (CATO).

Note that TTSH is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

DBGI shares were trading at $3.61 per share on Wednesday morning, up $0.08 (+2.27%). Year-to-date, DBGI has gained 6.18%, versus a 24.59% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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