Market Overview

DFBG Reports Second Quarter 2018 Results

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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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