Sales Increase 13%
Differential Brands Group Inc. (the “Company”) (NASDAQ: DFBG), a
portfolio of global premium consumer brands comprised of Hudson
Jeans, Robert Graham and SWIMS, today announced financial results
for the three and six months ended June 30, 2017.
For the second quarter:
- Net sales increased 13% to $36.5
million as compared to the second quarter of last year
- E-commerce net sales grew 38%, leading
to total Consumer Direct segment growth of 15% as compared to the
second quarter of fiscal 2016
- Gross margin expanded 590 basis points
to 44.5%
- Adjusted EBITDA was $2.0 million as
compared to $0.6 million in the same period last year.
Michael Buckley, Chief Executive Officer, commented, “We are
very pleased to have tripled our adjusted EBITDA as we continued to
execute our strategic initiatives across all of our brands and
channels during the second quarter of 2017. Almost every channel
within our brands produced positive ‘comps’. In our Consumer Direct
segment, we saw significant growth in our e-commerce channel driven
largely by higher conversion rates across our brands as a result of
better adoption of our product offerings, including 5% comparable
store sales at Robert Graham. In the Wholesale segment, growth was
driven by the addition of the SWIMS business, as well as increases
in both Hudson and Robert Graham sales as consumers responded
favorably to new product. As we look ahead, we intend to continue
making investments in our brands to expand our consumer reach and
better capitalize on our strong digital presence. This will include
major new ‘Fall 17’ and ‘Spring 18’ content and brand marketing
campaigns at Hudson, which we expect to launch in late August this
year, and a much expanded and market disruptive SWIMS product line,
now showing, for ‘Spring 18’. Overall, we plan to continue building
on our strong momentum and remain focused on further strengthening
our platform over the remainder of the year.”
Segment net sales and adjusted EBITDA results were as
follows:
Three months ended June 30, *
Six months ended June 30, * 2017 2016
2017 2016 (unaudited, in thousands)
(unaudited, in thousands) Differential Brands Group Net sales:
Wholesale $ 25,374 $ 22,755 $ 56,517 $ 48,332 Consumer Direct
10,425 9,097 18,771 16,736 Corporate and other 654
521 1,267 1,020 Total
Company net sales $ 36,453 $ 32,373 $ 76,555 $
66,088 Adjusted EBITDA Operating (loss) income:
Wholesale $ 5,570 $ 2,881 $ 13,926 $ 10,966 Consumer Direct 830 95
(383 ) (1,917 ) Corporate and other (6,623 ) (6,096 ) (14,072 )
(13,936 ) Adjustments** 2,178 3,767
5,032 9,079 Total Company Adjusted
EBITDA $ 1,955 $ 647 $ 4,503 $ 4,192
*For the six months ended June 30, 2016,
net sales and Adjusted EBITDA reflect the operations of Robert
Graham for the six months ended June 30, 2016 and Hudson for the
period between January 28, 2016 and June 30, 2016. For the three
and six months ended June 30, 2017, net sales and Adjusted EBITDA
include all three brands: Robert Graham, Hudson and SWIMS. See
further discussion at “Basis of Presentation of Information”
below.
**See “Adjusted EBITDA” below.
Second Quarter Financial Review
Total Company net sales for the three months ended June 30, 2017
increased 13% to $36.5 million, reflecting a 12% increase in
Wholesale segment sales and a 15% increase in Consumer Direct
segment sales. The Wholesale increase was driven by growth at
Hudson Jeans and Robert Graham, as well as by sales from the
addition of the SWIMS brand. The increase in the Consumer Direct
segment was led by overall e-commerce sales growth of 38%. In
addition, comparable store sales in the Robert Graham business grew
5%, driven by both full price and outlet stores. Comparable
Consumer Direct growth was driven primarily by improvements in
conversion rates across the brands.
Gross profit was $16.2 million compared to $12.5 million in the
second quarter of fiscal 2016. This includes approximately $0.8
million in gross profit from the SWIMS acquisition. The increase in
Hudson brand’s Wholesale gross profit resulted from an increase in
sales, as well as a benefit from a strategic shift in sourcing.
Robert Graham gross profit also increased compared to the prior
year period due to an increase in sales and higher initial margins.
Total Company gross margin was 44.5% compared to 38.6% in the
second quarter of 2016.
Operating expenses for the three months ended June 30, 2017,
were $16.4 million compared to $15.6 million in the same period of
the prior year. The increase is attributable to the addition of
SWIMS operating expenses, which were not reflected in the same
period last year. Selling, general and administrative expenses as a
percentage of net sales decreased to 40.9% from 43.6% in the second
quarter of 2016, primarily due to increased sales leverage and the
reduction in one-time transition and re-structuring costs from
mergers and acquisitions.
Operating loss was $0.2 million for the three months ended June
30, 2017. This compares to an operating loss of $3.1 million for
the same period last year.
Six Month Financial Review
Total Company net sales for the six months ended June 30, 2017
increased 16% to $76.6 million, reflecting a 17% increase in
Wholesale segment sales and a 12% increase in Consumer Direct
segment sales.
Gross profit was $34.8 million compared to $28.8 million for the
six months ended June 30, 2016. Total Company gross margin was
45.5% compared to 43.7% for the six months ended June 30, 2016.
Operating expenses for the six months ended June 30, 2017 were
$35.4 million compared to $33.7 million for the same period of the
prior year. Selling, general and administrative expenses as a
percentage of net sales decreased to 42.2% from 46.3% in the six
months ended June 30, 2016.
Operating losses were $0.5 million, for the six months ended
June 30, 2017. This compares to operating losses of $4.9 million
for the same period last year.
Basis of Presentation of Information
As previously disclosed, on January 28, 2016, the Company
completed the acquisition (the “RG Merger”) of all
outstanding equity interests of RG Parent LLC and its subsidiaries,
or the Robert Graham business (“RG”). Because RG was deemed
the accounting acquirer for financial reporting purposes, the
assets, liabilities and operations of the Company prior to January
28, 2016 that are reflected in the financial statements for the
three and six months ended June 30, 2016 reflect only RG’s
financial condition and results of operations and do not include
Hudson or SWIMS. More specifically, the Company’s consolidated
financial statements, as presented in part in this press release,
included: (i) from January 1, 2016 up to the day prior to the
closing of the RG Merger on January 28, 2016, the results of
operations and cash flows of RG; (ii) from and after the RG
Merger’s closing date on January 28, 2016, the results of
continuing operations, cash flows and, as applicable, the assets
and liabilities of the combined Company, comprising the Company’s
Hudson business and RG; (iii) from and after the RG Merger’s
closing date on January 28, 2016, the results of the discontinued
operations from the Company’s previously owned Joe’s brand retail
stores that later closed by February 29, 2016; and (iv) from and
after the acquisition of SWIMS on July 18, 2016, the results of
continuing operations and cash flows and, as applicable, the assets
and liabilities of SWIMS.
About Differential Brands Group
Differential Brands Group Inc. (NASDAQ: DFBG) is a platform that
focuses on branded operating companies in the premium apparel,
footwear and accessories sectors. Our focus is on organically
growing our brands through a global, omni-channel distribution
strategy while continuing to seek opportunities to acquire
accretive, complementary, premium brands.
Our current brands are Hudson®, a designer and marketer of
women’s and men’s premium, branded denim and apparel, Robert
Graham®, a sophisticated, eclectic apparel and accessories brand
seeking to inspire a global movement, and SWIMS®, a Scandinavian
lifestyle brand best known for its range of fashion-forward,
water-friendly footwear, apparel and accessories. For more
information, please visit Differential's website at
www.differentialbrandsgroup.com.
Forward-Looking Statements
This release contains forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The matters discussed in this release involve
estimates, projections, goals, forecasts, assumptions, risks and
uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements.
All statements in this release that are not purely historical facts
are forward-looking statements, including statements containing the
words “may,” “will,” “expect,” “anticipate,” “intend,” “estimate,”
“continue,” “believe,” “plan,” “project,” “will be,” “will
continue,” “will likely result” or similar expressions. Any
forward-looking statement inherently involves risks and
uncertainties that could cause actual results to differ materially
from the forward-looking statements. Factors that would cause or
contribute to such differences include, but are not limited to: the
risk of intense competition in the denim and premium lifestyle
apparel industries; risks associated with maintaining or enhancing
the Company’s brand, particularly in new markets where we have
limited brand recognition; the risk that the Company incurred
substantial indebtedness in connection with the acquisition of RG,
and, to a lesser extent, SWIMS, and that the Company’s business may
not generate sufficient cash flow from operations to enable the
Company to pay its indebtedness or to fund its liquidity needs;
risks associated with the Company’s foreign sourcing of its
products and the implementation of foreign production for Hudson’s
products, including in light of potential changes in international
trade relations brought on by the U.S. presidential administration;
the effects of the RG Merger and acquisition of SWIMS on the
Company’s financial results, business performance and product
offerings and risks associated with successfully integrating these
businesses to achieve cost savings and synergies; risks associated
with the Company’s third-party distribution system; risks
associated with changing fashion trends and business environment
and the Company’s customer base; risks associated with leasing
retail space and operating the Company’s own retail stores; risks
associated with the restatement of the Company’s unaudited
condensed consolidated financial statements as of and for the three
months ended March 31, 2016; the risk that the Company will be
unsuccessful in gauging fashion trends and changing customer
preferences; the risk that the credit ratings of the combined
company or its subsidiaries, including the Hudson, RG and SWIMS
businesses, may be different from what the Company expects; the
risk that changes in general economic conditions, consumer
confidence or consumer spending patterns, including consumer demand
for denim and premium lifestyle apparel, will have a negative
impact on the Company’s financial performance or strategies and the
Company’s ability to generate cash flows from its operations to
service its indebtedness; risks related to the Company’s ability to
respond to the business environment and fashion trends; risks
related to continued acceptance of the Company’s brands in the
marketplace; risks related to the Company’s reliance on a small
number of large customers; risks related to the Company’s ability
to implement successfully any growth or strategic plans; risks
related to the Company’s ability to manage its inventory
effectively; the risk of cyber-attacks and other system risks;
risks related to the Company’s ability to continue to have access
on favorable terms to sufficient sources of liquidity necessary to
fund ongoing cash requirements of its operations or new
acquisitions; risks related to the Company’s ability to continue to
have access on favorable terms to sufficient sources of liquidity
necessary to fund ongoing cash requirements of the Company’s
operations or new acquisitions; risks related to our pledge of all
the Company’s tangible and intangible assets as collateral under
its financing agreements; risks related to the Company’s ability to
generate positive cash flow from operations; risks related to a
possible oversupply of denim in the marketplace; and the other
risks. The Company discusses certain of these and other risk
factors more fully in its filings with the SEC, including its
annual report on Form 10-K for the fiscal year ended December 31,
2016 and subsequent reports filed with the SEC, and this release
should be read in conjunction with those reports through the date
of this release. The Company urges you to consider all of these
risks, uncertainties and other factors carefully in evaluating the
forward-looking statements contained in this release.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
Since the Company operates in a rapidly changing environment, new
risk factors can arise and it is not possible for the Company’s
management to predict all such risk factors, nor can the Company’s
management assess the impact of all such risk factors on the
Company’s business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
The Company’s future results, performance or achievements could
differ materially from those expressed or implied in these
forward-looking statements. The Company does not undertake any
obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events, except as may be
required by law.
DIFFERENTIAL BRANDS GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in
thousands, except per share data) Three months ended
June 30, Six months ended June 30, 2017
2016 2017 2016 (unaudited) (unaudited) Net
sales $ 36,453 $ 32,373 $ 76,555 $ 66,088 Cost of goods sold
20,234 19,862 41,733
37,240 Gross profit 16,219 12,511 34,822 28,848
Operating expenses Selling, general and administrative 14,915
14,130 32,319 30,593 Depreciation and amortization 1,527 1,501
3,032 2,863 Retail store impairment — —
— 279 Total operating expenses
16,442 15,631 35,351
33,735 Operating loss from continuing operations (223 )
(3,120 ) (529 ) (4,887 ) Interest expense 2,207 1,995 4,254 3,336
Other (income) expense, net (12 ) — 11
— Loss from continuing operations before
income taxes (2,418 ) (5,115 ) (4,794 ) (8,223 ) Income tax
provision (benefit) 1,636 (1,510 )
1,610 577 Loss from continuing operations
(4,054 ) (3,605 ) (6,404 ) (8,800 ) Loss from discontinued
operations, net of tax — — —
(1,286 ) Net loss $ (4,054 ) $ (3,605 ) $ (6,404 ) $
(10,086 ) Loss per common share - basic and diluted Loss
from continuing operations $ (0.30 ) $ (0.29 ) $ (0.48 ) $ (0.74 )
Loss from discontinued operations - -
- (0.11 ) Loss per common share - basic and
diluted $ (0.30 ) $ (0.29 ) $ (0.48 ) $ (0.85 ) Weighted
average shares outstanding Basic 13,309 12,380 13,298 11,852
Diluted 13,309 12,380 13,298 11,852
As a Percent of Sales
Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016 (unaudited)
(unaudited) Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods
sold 55.5% 61.4% 54.5% 56.3% Gross
profit 44.5% 38.6% 45.5% 43.7% Operating expenses Selling,
general and administrative 40.9% 43.6% 42.2% 46.3% Depreciation and
amortization 4.2% 4.6% 4.0% 4.3% Retail store impairment
0.0% 0.0% 0.0% 0.4% Total operating expenses
45.1% 48.3% 46.2% 51.0% Operating loss from continuing
operations 6.1% 6.2% 5.6% 5.0% Interest
expense 0.0% 0.0% 0.0% 0.0% Other (income) expense, net
-6.6% -15.8% -6.3% -12.4% Loss from continuing
operations before income taxes 4.5% -4.7% 2.1% 0.9% Income tax
provision (benefit) -11.1% -11.1% -8.4%
-13.3% Loss from continuing operations 0.0% 0.0% 0.0% -1.9% Loss
from discontinued operations, net of tax -11.1%
-11.1% -8.4% -15.3% Net loss 0.0% 0.0%
0.0% 0.0%
Adjusted EBITDA
Three months ended June 30, Six months ended June
30, 2017 2016 2017 2016 (unaudited,
in thousands) (unaudited, in thousands) Reconciliation of GAAP net
loss from continuing operations to Adjusted EBITDA: GAAP net loss
from continuing operations $ (4,054 ) $ (3,605 ) $ (6,404 ) $
(8,800 ) Adjustments: Provision (benefit) for income taxes
1,636 (1,510 ) 1,610 577 Interest expense 2,207 1,995 4,254 3,336
Non-cash stock compensation (a) 461 312 900 1,019 Depreciation and
amortization 1,527 1,501 3,032 2,863 Acquisition-related costs (b)
— 813 — 2,973 Retail store impairment (c) — — — 279 Restructuring
(d) 90 928 933 1,541 Non-cash inventory expense (e) — 192 — 383
Store closure costs (f) — 21 67 21 Legal settlement costs (g) 100 —
100 — Foreign currency loss (12 ) — 11
— Total Adjustments 6,009 4,252 10,907 12,992
Adjusted EBITDA (1) $
1,955 $ 647 $ 4,503 $ 4,192
_________________________
(1) Adjusted EBITDA is defined as net loss from continuing
operations, excluding: income taxes, interest income or expense,
non-cash stock compensation, depreciation and amortization,
acquisition-related costs, retail store impairment, restructuring
costs, non-cash inventory expenses, store closure costs and gain or
loss related to foreign currency transactions. Management uses
Adjusted EBITDA as a measure of operating performance to assist in
comparing performance from period to period on a consistent basis
and to identify business trends relating to the Company’s financial
condition and results of operations. The Company believes Adjusted
EBITDA provides additional information for determining its ability
to meet future debt service requirements and capital expenditures.
(a) Represents stock compensation expense related to the
grant of restricted stock units and stock options. (b) Represents
acquisition-related costs related to legal, advisory and accounting
services in connection with the RG Merger and SWIMS acquisition.
These costs are not representative of the Company’s day-to-day
business. (c) Represents impairment of retail store leasehold
improvements related to one store. (d) Represents restructuring
charges for severance, termination of consulting arrangements and
recruiting costs related to a change in management and the RG
Merger, and additional costs incurred related to launching the new
Hudson e-commerce website and moving e-commerce distribution in
house. (e) Represents a non-cash inventory expense of Hudson
inventory acquired and stepped up to fair value that was sold
during the three and six months ended June 30, 2016. (f) Represents
the write-off of assets related to one store in which the lease was
cancelled during the first quarter of fiscal 2017 and the net
operating loss related to the lease termination of one store that
closed in the second quarter of fiscal 2016. (g) Represents the
amount recorded during the second quarter of 2017 for a legal
matter related to the prior period that is now estimable.
DIFFERENTIAL
BRANDS GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data) June
30, December 31, June 30, 2017 2016
2016 (unaudited) (unaudited)
ASSETS Current assets
Cash and cash equivalents $ 6,305 $ 6,476 $ 8,368 Accounts
receivable, net 16,982 20,225 14,339 Inventories, net 30,623 23,977
26,759 Prepaid expenses and other current assets
5,465 4,249 1,976
Total current assets 59,375 54,927 51,442 Property and
equipment, net 9,651 10,620 13,003 Goodwill 8,340 8,271 6,524
Intangible assets, net 90,669 91,886 84,965 Other assets
514 467 477
Total assets $ 168,549 $ 166,171
$ 156,411
LIABILITIES AND EQUITY
Current liabilities Accounts payable and accrued expenses $ 20,206
$ 19,930 $ 20,838 Short-term convertible notes 13,436 13,137 —
Current portion of long-term debt 1,875 1,250 875 Total current
liabilities 35,517 34,317 21,713 Deferred rent 3,609 3,636 3,624
Line of credit 17,492 12,742 12,000 Convertible notes 13,242 12,660
12,251 Long-term debt, net of current portion 45,991 47,218 47,694
Deferred income taxes, net 13,416 11,074 9,723 Other liabilities
— —
81 Total liabilities 129,267
121,647 107,086
Equity Series A convertible preferred stock 5 5 5 Common stock
1,332 1,324 1,239 Additional paid-in capital 59,962 59,154 56,093
Accumulated other comprehensive income (loss) 125 (221 ) —
Accumulated deficit (22,142 ) (15,738 )
(8,012 ) Total equity
39,282 44,524 49,325
Total liabilities and equity $ 168,549
$ 166,171 $ 156,411
DIFFERENTIAL BRANDS GROUP INC. CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands,
unaudited) Six months ended June 30, 2017
2016 CASH FLOWS FROM OPERATING ACTIVITIES Loss from
continuing operations $ (6,404 ) $ (8,800 ) Adjustments to
reconcile net loss from continuing operations to net cash used in
operating activities: Depreciation and amortization 3,032 2,863
Retail store impairment — 279 Amortization of deferred financing
costs 215 162 Amortization of convertible notes discount 350 359
Paid-in-kind interest 770 92 Stock-based compensation 900 1,019
Provision for bad debts 194 31 Amortization of inventory step up —
383 Deferred taxes 2,289 270 Changes in operating assets and
liabilities: Accounts receivable 3,081 (1,339 ) Inventories (6,591
) (411 ) Prepaid expenses and other assets (1,253 ) 217 Accounts
payable and accrued expenses 2,220 (8,264 ) Deferred rent
(20 ) 56 Net cash used in continuing operating
activities (1,217 ) (13,083 ) Net cash used in discontinued
operating activities — (1,384 ) Net cash used
in operating activities (1,217 ) (14,467 )
CASH FLOWS FROM INVESTING ACTIVITIES Cash paid in reverse
acquisition with Robert Graham, net of cash acquired — (6,538 )
Refund of security deposit 7 — Purchases of property and equipment
(601 ) (1,125 ) Net cash used in investing activities
(594 ) (7,663 ) CASH FLOWS FROM FINANCING
ACTIVITIES Proceeds from issuance of Series A convertible preferred
stock, net of offering costs — 49,881 Proceeds from term debt —
50,000 Repayment of long-term debt (625 ) (250 ) Proceeds from line
of credit, net 4,350 12,587 Repayment of terminated line of credit
and loan payable — (23,349 ) Payment of deferred financing costs
(124 ) (1,584 ) Redemption of unit holders — (58,218 ) (Repayment
of) proceeds from customer cash advances (1,707 ) 831 Payment of
accrued distribution to members — (1,366 ) Taxes paid in lieu of
shares issued for stock-based compensation (251 ) —
Net cash provided by financing activities 1,643
28,532 Effect of exchange rate changes
on cash and cash equivalents (3 ) — NET
CHANGE IN CASH AND CASH EQUIVALENTS (171 ) 6,402 CASH AND
CASH EQUIVALENTS, at beginning of period 6,476
1,966 CASH AND CASH EQUIVALENTS, at end of period $ 6,305
$ 8,368
Non-GAAP Financial Measures
This press release contains non-GAAP financial measures that
exclude the (i) effect of transaction expenses associated with the
RG Merger and SWIMS acquisition (including acquisition-related
costs, restructuring costs and the non-cash inventory expense of
the Hudson inventory acquired and stepped up to fair value that was
sold) during the three and six months ended June 30, 2016 and (ii)
other provisions and expenses during the three and six months ended
June 30, 2017 and 2016. Generally, a non-GAAP financial measure is
a numerical measure of a company’s historical or future financial
performance, financial position, or cash flows that either excludes
or includes amounts which are not normally excluded or included in
the most directly comparable measure calculated and presented in
accordance with generally accepted accounting principles generally
accepted in the United States (GAAP). Management uses these
non-GAAP financial measures to evaluate the performance of the
business over time on a consistent basis, identify business trends
relating to the financial condition and results of operations and
make business decisions. The Company believes that providing
non-GAAP measures is useful to provide a consistent basis for
investors to understand the Company’s financial performance in
comparison to historical periods and to allow investors to evaluate
the performance using the same methodology and information as that
used by management. However, investors need to be aware that
non-GAAP measures are subject to inherent limitations because they
do not include all of the expenses included under GAAP and they
involve the exercise of judgment of which charges are excluded from
the non-GAAP financial measure. Investors should consider these
non-GAAP financial measures in addition to, and not as substitutes
for or superior to, the Company’s other measures of the Company’s
financial performance that the Company prepares in accordance with
GAAP. Further, non-GAAP information may be different from the
non-GAAP information provided by other companies.
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version on businesswire.com: http://www.businesswire.com/news/home/20170814005845/en/
Investor Relations:Differential Brands Group Inc.Bob Ross,
323-558-5115Chief Financial Officer
Differential Brands Group Inc. (NASDAQ:DFBG)
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