Dive Brief:

• Fresh off a May initial public offering, Digital Brands Group has made its second appearance on S&P Global Market Intelligence's monthly list of most vulnerable publicly traded retail companies.
• The direct-to-consumer specialist has a 13.2% chance of default in the next 12 months, according to S&P estimates. That represents an improvement since July, when its one-year default probability was 16.2%.
• Digital Brands — which owns the Bailey 44, Ace Studios, DSTLD and the Harper & Jones apparel brands — announced the closing of a $10 million IPO in mid-May.

Dive Insight:

It has been a hot year in the retail IPO market. Eight major players in the industry have filed for an IPO or direct listing so far in 2021, and that comes after a year for IPOs generally that was the best in two decades and which included Casper, Poshmark and other retail companies. 

For digitally-focused retail upstarts, profits are by no means a prerequisite to wooing investors. The common formula is to seek growth first before using scale to rake in profits. 

Chewy, The RealReal, Farfetch, Casper and ThredUp, among others, disclosed losses when filing their IPO papers. Until 2020, online home goods specialist Wayfair posted a net loss for every year it ever reported going back to 2011, with an accumulated net loss that hit $2 billion by 2019.

It's possible that Amazon set the rules of the game. As an early e-commerce player, the company showed investors that years of losses could eventually translate into huge gains for investors. Some of the tolerance for loss-making could also be general enthusiasm in equity markets, which — thanks in large part to stimulus, central banks and vaccines — have shaken off the early turmoil of the pandemic era and taken off to new heights. 

In its IPO papers, Digital Brands Group warned potential investors that buying its stock "involves a high degree of risk," in part because of "significant net losses since our inception."

Formed in 2013, originally under the name "Denim .LA," Digital Brands is trying to capitalize on the growing digitization and long-time fragmentation of the apparel and fashion markets. The company, led by CEO John Hilburn Davis, aims to gain leverage by rolling up brands and creating scale. 

Key to the model is acquisitions. "We believe that greater scale will increase our purchasing power and negotiating strength with both customers and suppliers," the company said in its S-1 form. "We believe that more acquisitions generate more customer data and more product offerings, which allows us to create more personalized customer cohorts and marketing communications." 

The company says it operates its brands on a "decentralized basis," with separate executive teams running each brand while consolidating marketing and technology contracts and cross marketing to each brand's customers. Digital Brands lists its ideal acquisition targets as: "(1) strong legacy brands that have been mismanaged, (2) strong brands that do not have capital to grow, and (3) wholesale brands that are struggling to transition to e-commerce." Among its most recent purchases was suit and sportswear label Harper & Jones, which was acquired in October. 

Digital Brands sees competitive advantages in its model of acquisition and scale-seeking. But before it can thrive, it has to survive. The company has successfully grown its revenue even during 2020's apparel tribulations, but losses topped $10.7 million last year, nearly doubling its 2019 loss. And while its $15.5 million in outstanding debt isn't much in general terms, it is "significant" for an organization Digital Brands' size, and it needs cash to be serviced, according to the company.