DSTLD

LOS ANGELES Dstld, the contemporary denim brand born online, sees new opportunity to scale by taking the portfolio route and playing to strengths that can often come in numbers.

The company, originally began in 2012 as a fast fashion denim firm before switching to a premium focus and the name Dstld — pronounced distilled — in 2014. It has slowly built a following with its pitch of contemporary wardrobe essentials initially built around premium denim. The assortment has since been expanded to include T-shirts, leather jackets and accessories in a mostly monochromatic offering. It’s branded the work uniform of the creative set.

Dstld is now on its third round of funding via the Regulation A+ process as its founders eye the public markets, retooling the business once again with the creation of Digital Brands Group. Dstld and a soon-to-launch men’s wear line, called ACE Studios, are the first two brands in the Digital Brands Group portfolio. The plan, beginning in the second half of next year, is to begin an acquisition strategy that would add additional direct-to-consumer brands to the group’s stable.

“If you look at the life cycle of a lot of these [digitally native] companies, the story goes people find a product market fit or they find a problem in the marketplace to solve and they go into design development and sell through the direct channel. Then they start facing all the traditional issues in building these businesses,” said Mark Lynn, president and chairman. “The working capital model for these brands is harder than traditional brands and there’s been no real change in that model. So a lot of businesses have been relying on venture capital, and a lot of the money that’s raised in venture capital goes into building redundancies within these organizations.”

The pitch is Digital Brands Group helps with back-end functions, allowing the founders or creatives the capital to continue focusing on what they do best: nurturing their brands without having private equity or venture capital growth targets looming over their heads.

“When you take the customer-centric approach to the world,” Lynn said, “does the customer really care what platform you’re using for your back end? Do they care where your web site is hosted or what warehouse their product is coming from? No. They care about getting it in 24 hours.”

Earlier in the year, the company brought in Hil Davis, founder of men’s made-to-fit brand J. Hilburn and online retailer BeautyKind, to serve as chief operating officer and appointed him chief executive officer in September. In November the company is expected to complete its move to new headquarters in downtown on Broadway.

Dstld saw net revenue increase from $2.5 million to $3.8 million in 2017. Its net loss widened between 2016 and 2017 from $2.3 million to $3.3 million.

An auditor cited the company’s liquidity and ability to pay down debt as a going concern in its offering filing to the Securities and Exchange Commission. Lynn pointed to a business such as Amazon that lost money for many years before it turned profitable and argued many IPOs this year involved cash flow negative companies. He added the buildout of an e-commerce company and to actually compete with incumbent businesses requires spending and can take years of such spending before hitting a profit.

“Just because you’re a start-up, it doesn’t mean we’re not competing with Inditex or H&M,” he said. “So we have to be willing to invest to get to scale and growth. So you’re going to have to operate at a loss, particularly with these direct brands. Profitability is achieved at more like a $40 million to $50 million revenue level, not at a $10 million revenue level.”

For Digital Brands Group, the portfolio strategy in some ways is an opportunity to scale, without diluting the Dstld brand by having it expand too quickly into categories that may not make sense for its still developing customer base. It’s not the only way for the company to grow, Lynn said, but it is one way.

“We have this thesis around the efficacy of a microbrand,” Lynn said. “Direct channels allow brands to tell a very specific story and provide a very specific message. Say a company has raised $30 million of venture capital money and has been showing their investors they’re going to grow to $100 million next year. In their chase for revenue they decide to expand from apparel to footwear and they do it before they’ve built trust in apparel. We like this idea of brands being able to stay true to things that they really have a foothold in and expanding from a category side over a longer period of time.”

It’s a thesis that, if proven correct, answers the question of who becomes the new age VF Corp., Authentic Brands Group or otherwise that would house, more specifically, these up-and-coming born-online brands. It’s also a response to a trend that’s already started with large firms such as Target and Walmart that are either buying up brands, such as ModCloth or Bonobos in the latter’s case, or building lines in-house. Locally, Revolve has done that with brands such as House of Harlow, which was developed with Nicole Richie, and has also invested in smaller businesses. TechStyle Group, while focused on a subscription model, has developed multiple brands in-house, most recently teaming with Rihanna on the Savage x Fenty line or Kate Hudson on its fast-growing Fabletics division.

“The world is becoming more and more fragmented and so it’s going to be harder and harder to build $1 billion brands,” Lynn said. “In fact, it might get to the point of impossible. We believe there’s going to be a proliferation of $50 million to $100 million brands. So our thesis is a focus on those nuanced, niche brands, which are a better play.”

The plan now is to incubate one new brand in-house perhaps every 24 months, while the rest of Digital Brands Group’s energy is spent on acquisitions.

Dstld has raised about $7 million to date via Reg A+ and Lynn estimated the company will have increased that to $10 million by the time it closes this third round in January. Lynn said the company is also now “actively exploring a public listing,” admitting the move is unusual for such a small company but also countered that with the fact that most apparel firms also haven’t turned to Reg A+ for financing, opting instead to go with more traditional routes.

“The idea is that the public stock gives you a currency to start acquiring other brands,” Lynn said.

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