Shares of fashion-oriented e-commerce firm Digital Brands (NASDAQ:DBGI) surged initially higher on Wednesday before becoming choppy. At the start of the business week, management announced a 1-for-25 reverse stock split to become effective on Aug. 22 at 12:01 a.m. ET. While DBGI stock attracted significant online chatter earlier this morning, revere splits generally represent an admission of trouble.
According to the accompanying press release, DBGI stock will continue to trade on the Nasdaq exchange under the existing ticker symbol. Further, management first broached the reverse split subject in a proxy statement filed with the U.S. Securities and Exchange Commission (SEC) on July 19 of this year.
To be sure, the decision wasn’t a shocking one. Although an intriguing concept — Digital Brands aims to reshape the shopping experience through personalizing styled looks based on customer preferences — DBGI stock so far failed to resonate with investors. Since the start of the year, shares fell about 89%, a simply staggering loss.
In fairness, Digital Brands may be attracting speculative interest. Per Fintel, the availability of shares to be shorted at a leading prime brokerage (a non-inclusive figure to be clear) sits at zero at the time of writing. Still, the long-term trajectory has been terribly negative.
DBGI Stock Flails Desperately Against Troubling Headwinds
While Digital Brands attempts to break out of its downward spiral, the company suffers from multiple headwinds. Broadly, with Americans’ credit card debt hitting over $1 trillion, sentiment for discretionary retail businesses may dry up. Of course, that would not serve DBGI stock well.
Another issue is that the reverse split typically represents an admission of failure. As Barron’s pointed out, that’s a key reason why public companies are averse to initiating such moves. For full context, a reverse split doesn’t necessarily guarantee doom and gloom. Perhaps most notably, Citigroup (NYSE:C) implemented such a tactic following the 2008 financial crisis.
Still, reverse splits are rare because companies do everything to avoid them, which in itself is a bad signal for DBGI stock. Glaringly, the Financial Industry Regulatory Authority (FINRA) warned that “[r]everse stock splits are less common among seasoned companies that trade on one of the major U.S. stock exchanges.”
Plus, the agency warns that if a split is announced and actually occurs, investors should proceed with caution. Though the move can temporarily swing share prices higher, it may also scare off seasoned investors who are privy to what amounts to gimmicks.
Why It Matters
Presently, no analyst covers DGBI stock, which may be due to Digital Brands’ poor financials. According to investment data aggregator Gurufocus, the company suffers seven red flags. These include the issuance of new debt and a negative Altman Z-Score indicating severe distress.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
