Differential Brands Group Inc. (the “Company”) (NASDAQ: DFBG),
today announced its operating results for the three months and year
ended December 31, 2017.
For the fourth quarter:
- Net sales rose 7% compared to the same
quarter last year, to $45.1 million
- Consumer Direct net sales grew 8%,
fueled by 10% store sales growth including 7% comparable Robert
Graham store sales growth
- Gross profit increased by $2.1 million,
or 13%
- Adjusted EBITDA and net income (loss)
increased to $3.1 million and $4.1 million from $2.1 million and
$(4.9 million), respectively, in the prior year quarter
For the year:
- Net sales rose 10% to $164.1 million
from $149.3 million for the prior year
- Consumer Direct sales grew 9%, fueled
by 13% ecommerce comparable sales growth and 4% comparable store
sales growth
- Gross profit was up $10.5 million,
representing a 17% increase over the prior year
- Profit margin expanded by 268 basis
points
- Adjusted EBITDA and net loss improved
to $10.8 million and $(2.5 million) from $8.7 million and $(17.8
million), respectively, compared to last year
Michael Buckley, Chief Executive Officer, commented, “I am
pleased to report that all of our brands produced positive total
comparable sales, improved margin dollars, expanded margin rates
and leveraged SGA during the fourth quarter, 2017. We were also
very pleased with the momentum of our Consumer Direct business,
especially the continued progress of our Robert Graham stores
during the quarter, which were up 7% for the quarter on a
comparable basis with store net sales momentum continuing into Q1
2018. Robert Graham ecommerce, in particular, saw both more traffic
and a greater conversion rate during the 4th quarter. SWIMS
continued to compound its top line, growing 40% during the quarter
as a result of European growth and the opening of an additional
store during the quarter compared to the same quarter last year.
SWIMS also continued to expand its US based brand awareness and
distribution points. Lastly, Hudson continued to post solid
Wholesale performance, increasing Wholesale channel sales by
5%.”
Mr. Buckley continued, “For the upcoming 2018 fiscal year, we
have planned several key initiatives within each of the respective
brands. At the Hudson brand, we plan to test limited retail stores
in the United States and we are in development of a new line of
sportswear to complement our denim products for the Fall 2018
season. We are also investing in additional sales staff at Hudson
to help grow our diversified and important specialty store business
across the country. At Robert Graham, we are adding additional
catalog drops and circulation, as well as expanding the Robert
Graham assortment, through licensing, to include home furnishings
and additional accessory styles. Lastly, at SWIMS we are offering
an expanded assortment of footwear starting Spring 2018, to go
along with our outerwear line in Europe for Fall 2018. We also will
be adding our first full price SWIMS store at a key high street
location in Oslo, Norway in Fall 2018.”
Segment net sales and adjusted EBITDA results were as
follows:
Three months ended December 31,
Twelve months ended December 31, * 2017
2016 2017 2016
(unaudited, in thousands) (unaudited, in thousands) Net sales:
Wholesale $ 30,218 $ 28,534 $ 119,128 $ 108,829 Consumer Direct
14,136 13,132 42,095 38,622 Corporate and other 755
353 2,830 1,816 Total
Company net sales $ 45,109 $ 42,019 $ 164,053
$ 149,267 Adjusted EBITDA Operating income (loss):
Wholesale $ 5,668 $ 4,776 $ 27,826 $ 21,101 Consumer Direct 2,295
314 1,523 (2,216 ) Corporate and other (7,603 ) (7,976 ) (28,273 )
(29,038 ) Adjustments** 2,780 5,007
9,747 18,863 Total Company Adjusted
EBITDA $ 3,140 $ 2,121 $ 10,823 $ 8,710
*For the year ended December 31, 2016, net sales and Adjusted
EBITDA reflect the operations of Robert Graham for the full year
ended December 31, 2016, Hudson for the eleven months ended since
January 28, 2016, and SWIMS for the five months ended since July
18, 2016. For the year ended December 31, 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 for reconciliation with GAAP.
Fourth Quarter Financial Review
Total Company net sales for the three months ended December 31,
2017, increased 7% to $45.1 million, reflecting a 6% increase in
Wholesale segment sales and an 8% increase in Consumer Direct
segment sales. The Wholesale increase was driven by 40% growth at
SWIMS, as well as by modest growth from the Hudson brand, primarily
at full price specialty store doors. Robert Graham Wholesale was
down marginally for the quarter, (1% year over year) due primarily
to the timing of certain off-price shipments that were moved into
January 2018. The increase in the Consumer Direct segment was led
by retail store growth of 10%.
Gross profit was $18.9 million, compared to $16.8 million in the
fourth quarter of fiscal 2016, primarily related to the comparable
increase in sales volume. Total Company gross margin was 41.9%
compared to 39.9% in the fourth quarter of 2016 as a result of
better initial margins across all brands.
Selling, general and administrative expenses for the quarter
ended December 31, 2017, were $16.8 million compared to $16.2
million in the same period of the prior year. Selling, general and
administrative expense rate decreased to 37% from 39% in the fourth
quarter of 2016.
Operating income was $0.4 million for the three months ended
December 31, 2017, compared to an operating loss of $2.9 million
for the same period last year.
Adjusted EBITDA for the three months ended December 31, 2017 was
$3.1 million as compared to $2.1 million in the same quarter last
year.
Annual Financial Review
Total Company net sales for year ended December 31, 2017,
increased 10% to $164.1 million compared to $149.3 million in the
prior year, reflecting a 9% increase in Wholesale segment sales and
a 9% increase in Consumer Direct segment sales.
Gross profit was $71.8 million for the year ended December 31,
2017 compared to $61.3 million for the same period last year. Total
Company gross margin was 43.7% compared to 41.1% for the year ended
December 31, 2016.
Selling, general and administrative expenses for the year ended
December 31, 2017 were $64.4 million compared to $63.2 million for
the same period of the prior year. Selling, general and
administrative expense rate decreased to 39% from 42% in the year
ended December 31, 2016.
Operating income from continuing operations was $1.1 million for
the year ended December 31, 2017, compared to operating losses from
continuing operations of $10.2 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
year ended December 31, 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, as amended, 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; the risk that the Company’s
substantial indebtedness could adversely affect the Company’s
financial performance and impact the Company’s ability to service
its indebtedness; the 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 current
U.S. presidential administration; risks associated with the
Company’s third-party distribution system; the risk that the
Company will be unsuccessful in gauging fashion trends and changing
customer preferences; 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 the
Company’s 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 the
Company’s 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 its operations or new acquisitions; risks related
to the Company’s pledge of all its 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 other risk. The Company discusses certain of these factors more
fully in its additional filings with the SEC, including its annual
report on Form 10-K for the fiscal year ended December 31, 2017 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.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share
data)
Three months ended December 31,
Twelve months ended December 31, 2017
2016 2017 2016 (unaudited) Net
sales $ 45,109 $ 42,019 $ 164,053 $ 149,267 Cost of goods sold
26,216 25,256 92,303
87,987 Gross profit 18,893 16,763 71,750 61,280
Operating expenses Selling, general and administrative 16,754
16,195 64,370 63,244 Depreciation and amortization 1,536 1,556
6,061 6,012 Retail store impairment 243 1,898
243 2,177 Total operating
expenses 18,533 19,649 70,674
71,433 Operating income (loss) from continuing
operations 360 (2,886 ) 1,076
(10,153 ) Interest expense 2,307 2,105 8,844 7,531 Other
expense (income), net 22 (79 ) 21
42 Loss from continuing operations before
income taxes (1,969 ) (4,912 ) (7,789 ) (17,726 ) Income tax
benefit (6,107 ) (7 ) (5,331 ) (1,200 )
Income (loss) from continuing operations 4,138 (4,905 ) (2,458 )
(16,526 ) Loss from discontinued operations, net of tax —
— (1,286 ) Net income
(loss) $ 4,138 $ (4,905 ) $ (2,458 ) $ (17,812 )
Income (loss) from continuing operations $ 0.21 $ (0.47 ) $ (0.60 )
$ (1.71 ) Loss from discontinued operations —
— — (0.10 ) Income (loss) per common
share - basic $ 0.21 $ (0.47 ) $ (0.60 ) $ (1.81 )
Income (loss) from continuing operations $ 0.16 $ (0.47 ) $ (0.60 )
$ (1.71 ) Loss from discontinued operations —
— — (0.10 ) Income (loss) per common
share - diluted $ 0.16 $ (0.47 ) $ (0.60 ) $ (1.81 )
Weighted average shares outstanding Basic 13,333 13,089 13,313
12,428 Diluted 17,869 13,089 13,313 12,428
As a Percent of Sales
Three months ended December 31, Twelve months ended
December 31, 2017 2016 2017
2016 (unaudited) Net sales 100.0 % 100.0 %
100.0 % 100.0 % Cost of goods sold 58.1 % 60.1 %
56.3 % 58.9 % Gross profit 41.9 % 39.9 % 43.7 % 41.1
% Operating expenses Selling, general and administrative 37.1 %
38.5 % 39.2 % 42.4 % Depreciation and amortization 3.4 % 3.7 % 3.7
% 4.0 % Retail store impairment 0.5 % 4.5 %
0.1 % 1.5 % Total operating expenses 41.1 % 46.8 % 43.1 %
47.9 % Operating income (loss) from continuing operations
0.8 % -6.9 % 0.7 % -6.8 % Interest expense 5.1
% 5.0 % 5.4 % 5.0 % Other expense (income), net 0.0 %
-0.2 % 0.0 % 0.0 % Loss from continuing operations
before income taxes -4.4 % -11.7 % -4.7 % -11.9 % Income tax
benefit -13.5 % 0.0 % -3.2 % -0.8 %
Income (loss) from continuing operations 9.2 % -11.7 % -1.5 % -11.1
% Loss from discontinued operations, net of tax 0.0 %
0.0 % 0.0 % -0.9 % Net income (loss) 9.2 %
-11.7 % -1.5 % -11.9 %
Adjusted EBITDA
Three months ended
Twelve months ended December 31, December 31,
2017 2016 2017
2016 (unaudited, in thousands) (unaudited, in
thousands) Reconciliation of GAAP income (loss) from continuing
operations to Adjusted EBITDA: GAAP income (loss) from
continuing operations $ 4,138 $ (4,905 ) $ (2,458 ) $ (16,526 )
Adjustments: Income tax benefit (6,107 ) (7 ) (5,331 )
(1,200 ) Interest expense 2,307 2,105 8,844 7,531 Non-cash stock
compensation (a) 1,001 1,203 2,340 2,052 Depreciation and
amortization 1,536 1,556 6,061 6,012 Acquisition-related costs (b)
— 350 — 5,395 Retail store impairment (c) 243 1,898 243 2,177
Restructuring (d) — — 936 1,559 Non-cash inventory expense (e) — —
— 1,668 Store closure costs (f) — — 67 — Legal settlement costs (g)
— — 100 — Foreign currency loss (gain) 22 (79
) 21 42 Total Adjustments (998 ) 7,026
13,281 25,236
Adjusted EBITDA (1) $ 3,140 $ 2,121 $ 10,823
$ 8,710
(1) Adjusted EBITDA is defined as loss from continuing
operations, excluding: income taxes, interest expense, non-cash
stock compensation, depreciation and amortization,
acquisition-related costs, retail store impairment, restructuring
costs, non-cash inventory expenses, store closure costs, legal
settlement 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 property and
equipment.
(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 and SWIMS
inventory acquired and stepped up to fair value that was sold
during the year ended December 31, 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.
(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.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share
data)
December 31, December 31, 2017
2016 ASSETS Current assets Cash and
cash equivalents $ 8,250 $ 6,476 Factor accounts receivable, net
17,442 16,703 Accounts receivable, net 4,804 3,522 Inventories
31,733 23,977 Prepaid expenses and other current assets
4,832 4,249 Total current assets 67,061 54,927
Property and equipment, net 8,417 10,620 Goodwill 8,380 8,271
Intangible assets, net 89,332 91,886 Other assets 484
467 Total assets $ 173,674 $ 166,171
LIABILITIES AND EQUITY Current liabilities Accounts
payable and accrued expenses $ 22,204 $ 18,223 Short-term
convertible note 13,694 13,137 Cash advances from customers — 1,707
Current portion of long-term debt 2,813 1,250
Total current liabilities 38,711 34,317 Deferred rent 3,554
3,636 Line of credit 21,254 12,742 Convertible notes 13,866 12,660
Long-term debt, net of current portion 44,896 47,218 Deferred
income taxes, net 6,650 11,074 Total
liabilities 128,931 121,647
Equity Series A convertible preferred stock 5 5 Common stock 1,349
1,324 Additional paid-in capital 61,314 59,154 Accumulated other
comprehensive income (loss) 271 (221 ) Accumulated deficit
(18,196 ) (15,738 ) Total equity 44,743
44,524 Total liabilities and equity $ 173,674 $
166,171
DIFFERENTIAL BRANDS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
Year ended December 31, 2017
2016 CASH FLOWS FROM OPERATING ACTIVITIES Loss from
continuing operations $ (2,458 ) $ (16,526 ) Adjustments to
reconcile loss from continuing operations to net cash used in
operating activities: Depreciation and amortization 6,061 6,012
Retail store impairment 243 2,177 Amortization of deferred
financing costs 437 380 Amortization of convertible notes discount
690 916 Paid-in-kind interest 1,662 1,023 Stock-based compensation
2,340 2,052 Provision for bad debts 257 116 Amortization of
inventory step up — 1,659 Loss on disposal of assets 62 — Deferred
taxes (4,547 ) (1,086 ) Changes in operating assets and
liabilities: Accounts receivable (2,342 ) (4,554 ) Inventories
(7,644 ) 3,352 Prepaid expenses and other assets (519 ) 99 Accounts
payable and accrued expenses 4,107 (10,874 ) Deferred rent
(75 ) 68 Net cash used in continuing operating
activities (1,726 ) (15,186 ) Net cash used in discontinued
operating activities — (1,384 ) Net cash used
in operating activities (1,726 ) (16,570 )
CASH FLOWS FROM INVESTING ACTIVITIES Cash paid in reverse
acquisition with Robert Graham, net of cash acquired — (6,538 )
Refund (payment) of security deposit 3 (4 ) Purchases of property
and equipment (1,130 ) (2,046 ) Cash paid for the acquisition of
SWIMS, net of cash acquired — (11,828 ) Net
cash used in investing activities (1,127 ) (20,416 )
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance
of Series A convertible preferred stock, net of offering costs —
49,881 Proceeds from long-term debt — 50,000 Repayment of long-term
debt (938 ) (500 ) Proceeds from line of credit, net 7,708 12,784
Proceeds from short-term convertible note — 13,000 Repayment of
terminated line of credit and loan payable — (23,349 ) Payment of
deferred financing costs (124 ) (1,583 ) Redemption of unit holders
— (58,218 ) (Repayment of) proceeds from customer cash advances
(1,707 ) 814 Payment of accrued distribution to members — (1,366 )
Taxes paid in lieu of shares issued for stock-based compensation
(270 ) — Net cash provided by financing
activities 4,669 41,463 Effect
of exchange rate changes on cash and cash equivalents (42 )
33 NET CHANGE IN CASH AND CASH EQUIVALENTS
1,774 4,510 CASH AND CASH EQUIVALENTS, at beginning of year
6,476 1,966 CASH AND CASH EQUIVALENTS,
at end of year $ 8,250 $ 6,476
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 and SWIMS inventory acquired and stepped up to fair
value that was sold) during the three and twelve months ended
December 31, 2016 and (ii) other provisions and expenses during the
three and twelve months ended December 31, 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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Investor RelationsDifferential Brands Group Inc.Bob Ross, Chief
Financial Officer323.558.5115
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