Looking for a massively undervalued stock? Check out Digital Brands Group, Inc. (NASDAQ: DBGI), a digitally focused apparel company proving that being a trendsetter has its advantages.On Monday, DBGI announced a 766% surge in its comparative YoY E-Commerce January and February revenues. Shares rallied on the news, and since Friday are higher by more than 84% to $1.84 from its intraday low last Friday. Keep in mind, too, its comparable gains come during a traditionally lowest quarter in a seasonally affected sector. Thus, while DBGI is accelerating growth today, it's expected to gain more momentum in the next three quarters. (* share price at 2:37pm EST, Yahoo! Finance)
And here's the better news- surging revenues aren't the only thing attractive about DBGI. Its share price is another. In fact, combining revenues, a share count of about 12.9 million, an aggressive and accretive acquisition campaign, and peer multiples of at least 3X revenues make DBGI stock a compelling proposition. All tolled, based on current performance and 2022 guidance, Digital brands Group stock should justifiably be trading above the $5.00 level. And that's at a minimum. DBGI is also projected to be EBIDTA positive as early as this quarter and potentially net income positive by the end of 2022. That makes the company worth far more than its less than 1X multiple.
Moreover, there's no shortage of industry examples to justify a premium for DBGI. Warby Parker (NASDAQ: WRBY) sports a bullish $2.9 billion market cap, and another industry player, Allbirds (NASDAQ: BIRD), scores a $930 million valuation at the close of trading last week. Based on a price/sales perspective and year-end revenue expectations, WRBY holds a roughly 5.3X multiple and BIRD a 3.4X. What does DBGI have despite being much closer to becoming a profitable company and with revenue-generating momentum at its back, not its face? At closing last Friday, and based on the midpoint of its guidance, a price/sales multiple of less than 1X. While it's a valuation insult on several levels, the disconnect still exposes one big thing- a potentially massive opportunity.
Acquisitions Big Part Of 2022 Plan
In actuality, it's an opportunity too big to ignore. After all, DBGI isn't slowing its growth pace; they're in hyper-growth mode. After purchasing Stateside in August last year, DBGI is about to close its acquisition of Sundry, a "coastal casual" brand that posted $18.2 million in revenues during the first nine months of 2021, a 37.9% increase over the same period in 2020. More importantly, that transformative acquisition is more than a revenue-generating powerhouse; it also delivers significant bottom-line growth by adding to other EBIDTA positive acquisitions contributing strength to its bottom line. Sundry takes things a step further, having generated a net income of $2.7 during those same first nine months of 2021, an 11.7% increase over the same period in 2020. By the way, expectations are for all portfolio brands to perform appreciably better in 2022.
Not only that, once Sundry is officially added to the books, 2022 revenue estimates jump from a midpoint of $39 million to over $60 million. Better still, DBGI has guided for additional acquisitions to occur during the year. And with DBGI habitually delivering its promises, trust DBGI guidance. Thus, at roughly $1.40 a share, DBGI stock is lower than basement prices; it significantly undervalues an asset portfolio that is surging in value and contribution.
Even better, DBGI has kept dilution to a minimum despite fortifying its revenue-generating arsenal. They have used traditional debt to close deals and have maintained its outstanding share count at roughly 12.9 million. There is one convertible deal out there, but DBGI would still have just shy of 16 million shares in the float even if fully converted into shares. So, any suggestions made that DBGI is sitting on a convertible debt time-bomb are factually incorrect.
Navigating Measured Growth
Also, that impressive capital structure reinforces justification for DBGI stock to trade appreciably higher. Remember, its acquisitions are all EBIDTA positive, meaning they can support the traditional debt terms DBGI made. Even better, by leaving its treasury well-fortified as potential currency, DBGI could potentially eliminate all debt and become a more than $100 million company, assuming another 2022 acquisition, and still having less than 20 million shares outstanding. That could happen if shares reached about $5.00. By the way, its 52-week high is $8.80, and frankly, the company is significantly better positioned for growth today than at that time. Thus, becoming debt-free with an arsenal of performing assets could be closer than many think.
In addition, as its revenues update showed, DBGI has a substantial revenue-generating tailwind at its back. In Q3, DBGI generated about $2.2 million in revenues. Keep in mind, though, its big-ticket acquisitions added only a few months of revenue contributions based on the timing of those closings. But, DBGI is guiding for the bigger picture.
They forecast revenues to reach between $37.5 million and $42.5 million during FY 2022, a more than 350% increase over its 2021 projections. Not only that, DBGI is indicating positive EBITDA for the new year as well, leveraging the power inherent to its shared services platform. Keep this in mind, too. The Sundry acquisition is expected to add at least $20 million to its expected 2022 revenues. In 2023, that number should be higher as DBGI would recognize an entire year of contributions.
Brands Contribute Full Year In 2022
Notably, 2022 will be the first time DBGI reports full-year revenue contributions from Harper & Jones and Stateside, two portfolio assets that add appreciable revenue streams. But that's only two of its revenue-generating assets. Other brands, including Bailey 44 and DSTLD, add considerably more firepower.
In 2021 DBGI reported its Bailey 44 brand saw a 379% surge and DSTLD a 52% jump in revenues, which resulted from an aggressive marketing campaign into the year-end sales season. However, the excellent news there is that DBGI spent only a fraction of its $500,000 budget, about $30,000, to drive those increases. Thus, the dollar-to-dollar returns from the campaigns are more than impressive. They also show that its message reaches the right audience and markets effectively.
From an investor's perspective, perhaps best of all is that revenues are falling faster toward the bottom line. DBGI said its gross profit margin increased 96% year over year to 55.9%. That comes as the company realizes the benefits inherent to its shared services platform that adds efficiencies and cost savings. While the margins are hefty at roughly 56%, DBGI thinks they'll get even stronger. As an end result, and as noted, DBGI may become EBITDA positive in less than 30-days from today.
The DBGI Value Proposition Is In-Play
Better yet, net income may not be far behind, especially with its Bailey 44, DSTLD, Stateside, Harper & Jones, and soon, Sundry brands, firing on all cylinders. And as demand for its styles gains traction, so does DBGI's ability to capture increased "closet share" from clients wanting forward-thinking fashions, inspired styling, responsible manufacturing processes, and comfortable wearability. that's indeed the plan, and DBGI's current brand portfolio covers all the market bases. (Visit its portfolio of brands here)
Likely, that's a big reason why revenues went from doubling quarter over quarter to posting a 766% increase in only the first two months of Q1/2022 on a comparable basis. Of course, those following the developments at DBGI aren't surprised. Excellent products generally result in surging revenues.
But, what doesn't make sense is for the stock to trade behind the robust growth. Frankly, using just about any valuation metric, DBGI shares are appreciably undervalued. And even more so from a forward-looking perspective, where guidance puts its price-sales multiple at less than 1X revenues. Clearly, there's a disconnect. Still, that's not necessarily bad news for investors taking advantage of the current opportunity.
Too Big To Ignore
In fact, once investors understand that its capital structure is sound and that there is no threat of a toxic conversion, shares could quickly rally back toward 52-week highs. But putting dilution fears to rest is just one reason.
Other justifications for a rally include surging revenues, portfolio appreciation, increasing margins, and an acquisition strategy that could put $100 million in income into the near-term crosshairs. Thus, at current prices, a perfect storm of opportunity exists for investors wanting to seize a valuation gap that is, as noted, too big to ignore.
And if Monday's spike is an indication, investors are doing just that.
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