Differential Brands Group Inc., a portfolio of global premium consumer brands comprised of Hudson Jeans, Robert Graham and SWIMS, reported that total company net sales for the second quarter ended June 30 decreased 1 percent from the same quarter last year to $36 million.
Within consumer direct segment, e-commerce led an 8 percent gain in net sales by contributing a 12 percent increase over the prior year’s quarter. The consumer direct segment was also boosted by retail store net sales improvements of 8 percent over the same quarter last year. By store category, outlet stores led, recording a 12 percent jump, followed by full price stores improving 5 percent for the second quarter compared to the same quarter last year. Wholesale segment total net sales declined 6 percent for the second quarter as wholesale net sales improvements at Robert Graham and SWIMS of 11 percent and 64 percent, respectively, were offset by a wholesale sales reduction at Hudson.
The company announced EBITDA of $1.2 million, driven by an 8 percent increase in consumer direct sales, for the quarter.
Michael Buckley, CEO, 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 percent 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 percent during the second quarter, offsetting these gains. We continue course corrections at Hudson to navigate the shift in demand to retailers’ e-commerce 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.”
Second Quarter Financial Review
Total company net sales for the three months ended June 30, 2018, decreased 1 percent to $36 million from $36.5 million in the same quarter last year, reflecting an 8 percent increase in consumer direct segment sales and a 6 percent decrease in Wholesale segment sales. The consumer direct increase was driven by a 12 percent e-commerce channel increase and an 8 percent retail store channel increase during this period. Comparable store net sales increased 7 percent for the second quarter compared to the same quarter last year. The Wholesale segment net sales results reflected an 11 percent Robert Graham improvement over the same quarter last year, including a 14 percent year-over-year growth at full price specialty stores and a 64 percent percent increase in SWIMS wholesale net sales, including both U.S. and European volumes improving over 40 percent from the same quarter last year. Hudson wholesale net sales declined 20 percent, 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 e-commerce 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 percent 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 percent in the second quarter from 40.9 percent 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 e-commerce 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 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.
