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 EBITDA of $1.2
million driven by an 8% increase in Consumer Direct sales for the
three months ended June 30, 2018.
Total Company net sales for the second quarter of 2018 decreased
1% from the same quarter last year to $36.0 million. Within our
Consumer Direct segment, ecommerce led an 8% gain in net sales by
contributing a 12% increase over the prior year’s quarter. The
Consumer Direct segment was also boosted by retail store net sales
improvements of 8% over the same quarter last year. By store
category, outlet stores led, recording a 12% jump, followed by full
price stores improving 5% for the second quarter compared to the
same quarter last year. Wholesale segment total net sales declined
6% for the second quarter as wholesale net sales improvements at
Robert Graham and SWIMS of 11% and 64%, respectively, were offset
by a wholesale sales reduction at Hudson.
Michael Buckley, Chief Executive Officer, commented, “Our
Consumer Direct business continued its strong performance in the
second quarter at both Robert Graham and SWIMS. Robert Graham’s
assortment was embraced by its customers for Spring, and we are
optimistic for the Fall offering based on customer feedback thus
far. SWIM’s expanded Spring assortment was in high demand during
the second quarter as continued improvement in general brand
awareness in North America also played a major role. This momentum
bodes well for the Fall season. As I have mentioned before, the
Consumer Direct segment produces margins that are on-average 27
points better than Wholesale margins, thus, Consumer Direct
continues to be a priority focus of investment in the consolidated
strategy. Wholesale segment net sales results were also very strong
at Robert Graham and SWIMS. Except for Robert Graham full price
wholesale net sales, which were up 5% in the second quarter
compared to the same period last year, all other Robert Graham and
SWIMS wholesale distribution channels produced double-digit gains.
Hudson wholesale sales declined 20% during the second quarter
offsetting these gains. We continue course corrections at Hudson to
navigate the shift in demand to retailers’ ecommerce channels from
traditional physical store channels. Concurrently, we continue to
re-affirm Hudson’s brand identity through new marketing campaigns
and product offerings. Maria Borromeo, our recently hired President
of Hudson, is acclimating nicely while leading this effort and has
brought a heat-seeking focus to the Hudson strategy.”
Segment net sales and adjusted EBITDA results were as
follows:
Three months ended June 30,
Six months ended June 30, 2018
2017 2018
2017 (unaudited, in thousands) (unaudited, in thousands) Net
sales: Wholesale $ 23,821 $ 25,374 $ 52,399 $ 56,517 Consumer
Direct 11,237 10,425 20,694 18,771 Corporate and other 907
654 1,691 1,267
Total Company net sales $ 35,965 $ 36,453 $ 74,784
$ 76,555 Adjusted EBITDA Operating income
(loss): Wholesale $ 3,863 $ 5,570 $ 9,728 $ 13,926 Consumer Direct
943 830 1,006 (383 ) Corporate and other (10,408 ) (6,623 ) (16,890
) (14,072 ) Adjustments* 6,841 2,178
8,940 5,032 Total Company Adjusted
EBITDA $ 1,239 $ 1,955 $ 2,784 $ 4,503
*See “Adjusted EBITDA” below for reconciliation with GAAP.
Second Quarter Financial Review
Total Company net sales for the three months ended June 30,
2018, decreased 1% to $36.0 million from $36.5 million in the same
quarter last year, reflecting an 8% increase in Consumer Direct
segment sales and a 6% decrease in Wholesale segment sales. The
Consumer Direct increase was driven by a 12% ecommerce channel
increase and an 8% retail store channel increase during this
period. Comparable store net sales increased 7% for the second
quarter compared to the same quarter last year. The Wholesale
segment net sales results reflected an 11% Robert Graham
improvement over the same quarter last year, including a 14%
year-over-year growth at full price specialty stores, and a 64%
percent increase in SWIMS wholesale net sales, including both US
and European volumes improving over 40% from the same quarter last
year. Hudson wholesale net sales declined 20%, more than offsetting
the aforementioned wholesale gains. The majority of the decline was
driven by a lower volume of department store “doors” that Hudson is
selling into which more than offset an increase in the ecommerce
channel demand for those same customers. Reductions, as a rate
within the department, were approximately even in both the Men’s
and Women’s departments while Hudson specialty volume was flat
versus the second quarter last year.
Gross profit declined $1.7 million to $14.5 million for the
second quarter of 2018, from $16.2 million for the same quarter
last year. The decline was primarily driven by lower initial
wholesale margins at the Hudson brand that more than offset initial
margin gains at Robert Graham and SWIMS. Gross margin rates
declined 420 basis points primarily due to a greater proportion of
off price sales to remove prior season or slow moving inventory
relative to the same quarter last year. Inventory levels were
appropriate at June 30, 2018, up 2% from June 30, 2017.
The Company reduced selling, general and administrative expenses
for the second quarter 2018 by $800 thousand to $14.1 million from
$14.9 million for the same quarter last year after excluding
acquisition related expenses incurred in the second quarter of $4.6
million. Excluding acquisition related expenses, selling, general
and administrative expense rate decreased to 39.2% in the second
quarter from 40.9% in the second quarter of last year. Operating
expense improvements relate to contractual reductions of third
party wholesale selling agent rates, leverage of Robert Graham
store payroll based on store sales volume increases and leverage of
ecommerce fixed infrastructure, also based on additional sales
volume increases within the selling channel.
Adjusted EBITDA for the second quarter of 2018 was $1.2 million
as compared to $2.0 million for the same quarter last year.
For the second quarter of 2018 and 2017, net loss and loss per
share were $5.7 million and $0.54 per share, including $4.6 million
of acquisition costs and a tax benefit of $2.4 million compared to
$4.1 million and $0.41 per share, respectively, including a tax
provision of $1.6 million during the same quarter last year.
Recent Developments
As previously announced, on June 27, 2018, the Company entered
into a Purchase and Sale Agreement (the “Purchase
Agreement”) with Global Brands Group Holding Limited
(“GBG”) and GBG USA Inc., a wholly-owned subsidiary of GBG
(“GBG USA”), to purchase a significant part of GBG’s and its
subsidiaries’ North American business, including the wholesale,
retail and e-commerce operations, comprising all of their North
American kids business, all of their North American accessories
business and a majority of their West Coast and Canadian fashion
businesses for a purchase price of $1.38 billion, to be paid in
cash and subject to adjustment (the “GBG Transaction”). The
closing of the GBG Transaction is subject to satisfaction or waiver
of customary closing conditions, including (i) the expiration or
termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act; (ii) the approval of
the GBG Transaction by GBG’s stockholders in accordance with
applicable Hong Kong listing rules; (iii) the approval of the
issuance of certain shares of the Company’s common stock by the
Company’s stockholders pursuant to NASDAQ listing requirements;
(iv) each of GBG and the Company having delivered all required
closing deliverables (including certain third party consents in the
case of GBG); and (v) the entry into a mutually agreed transition
services agreement. The Company expects to close the GBG
Transaction in the third quarter of 2018. As of the date of this
release, (i) the parties were granted early termination of the
applicable waiting period under the Hart-Scott Rodino Antitrust
Improvements Act effective as of August 10, 2018, (ii) the Company
has received requisite shareholder approval under NASDAQ listing
standards for the issuance of up to 60 million shares of the
Company’s common stock (assuming a maximum offering size of up to
$175 million) in connection with the GBG Transaction and has filed
a preliminary information statement with the Securities and
Exchange Commission related thereto, and (iii) GBG has received
requisite approval of the GBG Transaction from its shareholders at
a recently scheduled meeting of its shareholders held on August 2,
2018. There can be no assurance that all of the closing conditions
required to be satisfied or waived in order to consummate the GBG
Transaction will be satisfied or waived or that if such closing
conditions are satisfied or waived that the GBG Transaction will be
consummated.
About Differential Brands Group
Differential Brands Group Inc. (NASDAQ: DFBG) 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 parties’ ability to close the GBG Transaction,
including the receipt and terms and conditions of any required
governmental approval of or required financing for the GBG
Transaction that could reduce anticipated benefits or cause the
parties to abandon the GBG Transaction; the diversion of
management's time and attention from the Company’s ongoing business
during this time period; the impact of the GBG Transaction on the
Company’s stock price; the anticipated benefits of the GBG
Transaction on its financial results, business performance and
product offerings, the Company’s ability to successfully integrate
GBG’s business and realize cost savings and any other synergies;
the risk that the credit ratings of the combined company or its
subsidiaries may be different from what the Company expects; 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 proposed to be implemented
by the U.S. government; risks associated with the Company’s
third-party distribution system; continued acceptance of our
product, product demand, competition, capital adequacy, general
economic conditions and the potential inability to raise additional
capital if required; 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; the highly competitive nature of the
Company’s business in the United States and internationally and its
dependence on consumer spending patterns, which are influenced by
numerous other factors; 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 risks. 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.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share
data)
Three months ended June 30, Six months ended June
30, 2018 2017 2018 2017 (unaudited)
(unaudited) Net sales $ 35,965 $ 36,453 $ 74,784 $ 76,555 Cost of
goods sold 21,485 20,234 44,103
41,733 Gross profit 14,480 16,219 30,681
34,822 Operating expenses Selling, general and administrative
18,670 14,915 33,963 32,319 Depreciation and amortization
1,412 1,527 2,874 3,032
Total operating expenses 20,082 16,442
36,837 35,351 Operating loss
(5,602 ) (223 ) (6,156 ) (529 ) Interest expense 2,419 2,207 4,635
4,254 Other expense (income), net 103 (12 )
102 11 Loss before income taxes (8,124
) (2,418 ) (10,893 ) (4,794 ) Income tax (benefit) provision
(2,440 ) 1,636 (1,124 ) 1,610
Net loss $ (5,684 ) $ (4,054 ) $ (9,769 ) $ (6,404 ) Loss
per common share - basic and diluted $ (0.54 ) $ (0.41 ) $ (0.97 )
$ (0.69 ) Weighted average shares outstanding Basic 13,980
13,309 13,766 13,298 Diluted 13,980 13,309 13,766 13,298
As a Percent of Sales
Three months ended June 30,
Six months ended June 30, 2018
2017 2018
2017 (unaudited) (unaudited) Net sales 100.0 %
100.0 % 100.0 % 100.0 % Cost of goods sold
59.7 % 55.5 % 59.0 % 54.5 % Gross profit 40.3
% 44.5 % 41.0 % 45.5 % Operating expenses Selling, general and
administrative 51.9 % 40.9 % 45.4 % 42.2 % Depreciation and
amortization 3.9 % 4.2 % 3.8 % 4.0 %
Total operating expenses 55.8 % 45.1 % 49.3 %
46.2 % Operating loss (15.6 %) (0.6 %) (8.2 %) (0.7 %)
Interest expense 6.7 % 6.1 % 6.2 % 5.6 % Other expense (income),
net 0.3 % (0.0 %) 0.1 % 0.0 % Loss
before income taxes (22.6 %) (6.6 %) (14.6 %) (6.3 %) Income tax
(benefit) provision (6.8 %) 4.5 % (1.5 %)
2.1 % Net loss (15.8 %) (11.1 %) (13.1
%) (8.4 %)
Adjusted EBITDA
Three months ended June 30,
Six months ended June 30, 2018
2017 2018
2017 (unaudited, in thousands) (unaudited, in thousands)
Reconciliation of GAAP net loss to Adjusted EBITDA: GAAP net loss $
(5,684 ) $ (4,054 ) $ (9,769 ) $ (6,404 ) Adjustments:
(Benefit) provision for income taxes (2,440 ) 1,636 (1,124 ) 1,610
Interest expense 2,419 2,207 4,635 4,254 Non-cash stock
compensation (a) 870 461 1,507 900 Depreciation and amortization
1,412 1,527 2,874 3,032 Acquisition-related costs (b) 4,559 — 4,559
— Restructuring (c) — 90 — 933 Store closure costs (d) — — — 67
Legal settlement costs (e) — 100 — 100 Foreign currency loss (gain)
103 (12 ) 102 11 Total
Adjustments 6,923 6,009 12,553 10,907
Adjusted EBITDA (1) $ 1,239 $
1,955 $ 2,784 $ 4,503 (1)
Adjusted EBITDA is defined as net loss excluding: income taxes,
interest expense, non-cash stock compensation, depreciation and
amortization, acquisition-related costs, restructuring costs, 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 associated with the Purchase and Sale
Agreement entered into with Global Brands Group Holding Limited
(“GBG”) on June 27, 2018. The acquisition contemplated by the
Purchase and Sale Agreement is expected to close in the third
quarter of 2018, which will result in the combination of a
significant part of GBG’s and its subsidiaries’ North American
business with the Company’s existing platform. (c) Represents
restructuring charges for severance and recruiting costs related to
a change in management, and additional costs incurred related to
launching the new Hudson ecommerce website. (d) Represents the
write-off of assets related to one store in which the lease was
cancelled during the first quarter of fiscal 2017. (e) Represents
the amount recorded during the second quarter of 2017 for a legal
matter related to the prior period that is now estimable.
Non-GAAP Financial Measures
This press release contains non-GAAP financial measures.
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.
DIFFERENTIAL BRANDS GROUP INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
(amounts in thousands)
June 30, December 31, June 30,
2018 2017 2017 (unaudited) (unaudited)
ASSETS Current assets Cash and cash equivalents $ 5,029 $
8,250 $ 6,305 Accounts receivable, net 18,067 22,246 16,982
Inventories 31,330 31,733 30,623 Prepaid expenses and other current
assets 7,111 4,832 5,465
Total current assets 61,537 67,061 59,375 Property and equipment,
net 7,690 8,417 9,651 Goodwill 8,409 8,380 8,340 Intangible assets,
net 87,954 89,332 90,669 Other assets 2,207
484 514 Total assets $ 167,797 $
173,674 $ 168,549
LIABILITIES AND
EQUITY Current liabilities Accounts payable and accrued
expenses $ 26,010 $ 22,204 $ 20,206 Short-term convertible note —
13,694 13,436 Current portion of long-term debt 3,750
2,813 1,875 Total current liabilities
29,760 38,711 35,517 Line of credit 20,428 21,254 17,492
Convertible notes 14,521 13,866 13,242 Long-term debt, net of
current portion 43,173 44,896 45,991 Deferred income taxes, net
5,355 6,650 13,416 Other liabilities 3,790
3,554 3,609 Total liabilities 117,027
128,931 129,267 Equity
Series A convertible preferred stock 5 5 5 Series A-1 convertible
preferred stock 459 — — Common stock 1,408 1,349 1,332 Additional
paid-in capital 75,676 61,314 59,962 Accumulated other
comprehensive income (loss) 412 271 125 Accumulated deficit
(27,190 ) (18,196 ) (22,142 ) Total equity
50,770 44,743 39,282 Total
liabilities and equity $ 167,797 $ 173,674 $ 168,549
DIFFERENTIAL BRANDS GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in thousands)
Six months ended June 30, 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (9,769 ) $ (6,404 )
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: Depreciation and amortization 2,874 3,032
Amortization of deferred financing costs 220 215 Amortization of
convertible notes discount 368 350 Paid-in-kind interest 828 770
Stock-based compensation 1,507 900 Provision for bad debts 96 194
Loss on disposal of assets 4 — Deferred taxes (1,318 ) 2,289
Changes in operating assets and liabilities: Accounts receivable
6,176 3,081 Inventories 88 (6,591 ) Prepaid expenses and other
assets (1,426 ) (1,253 ) Accounts payable and accrued expenses 321
2,220 Other liabilities 183 (20 ) Net cash
provided by (used in) operating activities 152
(1,217 ) CASH FLOWS FROM INVESTING ACTIVITIES Refund of
security deposit — 7 Purchases of property and equipment
(770 ) (601 ) Net cash used in investing activities
(770 ) (594 ) CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (938 ) (625 ) (Repayment of) proceeds
from line of credit, net (1,354 ) 4,350 Payment of deferred
financing costs — (124 ) Repayment of customer cash advances —
(1,707 ) Taxes paid in lieu of shares issued for stock-based
compensation (391 ) (251 ) Net cash (used in)
provided by financing activities (2,683 ) 1,643
Effect of exchange rate changes on cash and cash
equivalents 80 (3 ) NET CHANGE IN CASH
AND CASH EQUIVALENTS (3,221 ) (171 ) CASH AND CASH
EQUIVALENTS, at beginning of period 8,250
6,476 CASH AND CASH EQUIVALENTS, at end of period $ 5,029
$ 6,305
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version on businesswire.com: https://www.businesswire.com/news/home/20180814005720/en/
Investor Relations:Differential Brands Group Inc.Bob Ross, Chief
Financial Officer323.558.5115
Differential Brands Group Inc. (NASDAQ:DFBG)
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