Q4 2020 Delta Apparel Inc Earnings Call

It will continue to explore additional retail store opportunities in the upcoming fiscal year.

Engagement on the Salt Life eCommerce site has also remained very strong with sales and fiscal 2020 over 50% compared to the prior-year and up over eighty percent of the back half of the year compared to the same period last year we were seeing promising engagement metrics such as increased traffic to the site duration and engagement wants on the south and increased average order value. We are always looking for ways to engage our with our consumers and are adding new content weekly focused on the enthusiasts. We will be patient and all activities. It has to offer during fiscal year two thousand and twenty are salt lights of subscriber list, which is comprised of consumers who opt-in to receive marketing information from the brand new over a hundred and 30% In fact more consumers join in the fourth quarter of 2020 alone, then they did and all the fiscal 2019.

In the coming year, we continue to see the growth opportunities with our saltlight consumer e-commerce site. I open an additional retail doors and select markets and continuing to partner with our wholesale customers to expand the floor space and enhance the salt life experience within their doors.

We could not have asked for a better into the fiscal year. We registered strong fourth-quarter results with balanced growth across all of our business units while successively managing with an eye towards cash of operation the quiddity and the well-being and safety of our employees and customers. I'll now turn the call over to Dell to review our financial results and more detailed notes Bob noted. Our fourth quarter performance was exceptional. We delivered strong profitable growth for the. Driven by a return to sales growth across all of our businesses benefiting in park and stronger-than-expected productivity levels, as our manufacturing teams safely ramped up production quicker than we originally expected.

Our fourth quarter fiscal 2020 sales were a hundred and sixty.

18.7 million and increase of 8.1% compared to the prior-year. Net sales in the Delta Group segment and the Salt Lake segment increased 7.6% and 12.5% respectively from the prior year. As both segments off strong sequential improvement from our third-quarter performance, gross profits or twenty four point nine million paired to gross profit of 22.9 million in the prior-year fourth-quarter gross margin improved by 20 basis points to 21.4% compared to 21.2% in the fourth quarter of this 119. This performance was better than anticipated as our manufacturing productivity rant faster than originally expected resulting in only about two hundred thousand dollars of manufacturing start-up costs incurred in the fourth quarter compared to the expected to two three million range. We originally anticipated. I want to Echo bombs comments on how proud We are dead.

Manufacturing team to expedite production level successfully and safely as you are aware two major hurricanes recently made landfall in Central American or Canadian took a Toyota which further damage the already tight supply chain of activewear apparel for the us our thoughts and prayers go out to everyone in the region impacted by these events and facilities and Equipment were not damaged in either of the storms and our manufacturing team has once again demonstrated their resiliency and dedication which has allowed us to resume production wages minimal downtime.

We continue to keep a strong focus on managing our operating and sg&a expenses expenses declined six and a half percent to Seventeen point three million compared to a point four million in the prior year fourth quarter with the reduced spending and higher sales in the current year. We leveraged sg&a expenses as a percentage of sales reducing sg&a by a month, but by 230 basis points from the prior year. To 14.8% of sales this year.

Operating income with eight point three million compared to 4.8 million in the prior year fourth quarter. The 70% Improvement was driven by an improvement of three point five million in the Delta Group segment year-over-year reflecting manufacturing efficiencies and operational improvements achieved with the strong sales results that income from the quarter with five million seventy-one cents per share compared to net income of 3.5 million or fifty cents per diluted share in the prior year. In addition to strong operating performance in our fourth quarter of we also improve the strength of our balance sheet be generated 9.8 million of operating cash flows in 5.2 million of free cash flow in the fourth quarter, even as we ramped up to reproduction to support future sales growth.

our total net

Including Capital Leaf financing as of September was 122.2 Million down about $13 million from a year ago ending fiscal 2020 with cash on hand and availability under our credit facility of 47.1 million and Improvement of nearly twenty million dollars from last September providing provides us strong quiddity and flexibility for fiscal 2021 during fiscal 2020 Capital expenditures were thirteen point six million with over half of this being spent on expanding our app or distribution Network increasing capacity of dtg2go digital print and enhancing our business systems and Technologies to support new sales opportunities in addition Thursday open to new Salt Lake retail stores broadening our direct-to-consumer reach in fiscal 2021. We're planning Capital expenditures to be about 50% higher with plants Panthers.

Focused on the growth of her on demand dtg2go business as well as additional Salt Lake branded Source. This has certainly been an unprecedented year. We are incredibly proud of the dedicated focus of our team members to reach our goals driving our Strong finish to the year. We believed also Carol has emerged from the pandemic a stronger company and more Nimble than ever met. So many factors that are outside of our control will influence how the upcoming year unfolds, but we are confident in our ability to successfully navigate what the future brings as we look at the the half of fiscal 2021. We would expect overall revenues to be constrained driven principally from the short-term inventory constraints inventory availability should improve as the year progresses as we plan to increase manufacturing output in calendar 20-21 ultimately expecting to reach record production levels for our company.

We will continue to manage our spending tightly, but will be incurring certain integration and ramp-up costs within our distribution and digital print networks with a new facilities to support our growth initiatives. I'm putting this all together. We do expect to operate profitably in the first half of fiscal 2021 with a sequential Improvement by quarter setting ourselves up for profitable growth in the back half of month of answering the call back over to Bob before we open up for questions.

Thanks, ma'am. Our fourth quarter performance was exceptional and we believed we have for lease for a strong fiscal 2021 Accord activewear business is well positioned for continued through Thursday. We both are full service private label business in our new more expensive Delta catalog offerings, including Delta soap and distributor products all menus through a Consolidated sales rep who believe the pandemic has still greater awareness of the on demand supply chain model accelerating the growth opportunities in our dtg2go digital print business duty to go off on the Forefront of revolutionising the supply chain for the apparel industry. Finally the momentum we experience in our salt like business is a true Testament to the enthusiasm a national connection consumers half of the salt white brand and it's authentic aspirational lifestyle and Embraces those who love the ocean side wall salt life has a long runway for future growth ahead.

as we enter our

Fiscal year we remain confident that our Diversified and uniquely positioned business model business on a solid path for future profitable growth. I want to thank our board of directors and employees wage on wavering support and dedication through the very challenging 2020 year operator would be now be glad to open up the call to questions.

Absolutely. Thank you. If you'd like to ask a question, please press star one on your telephone keypad. If you are using a speaker phone, please make sure that your information is turned off to allow your signal to reach out equipment. Once again, that is star one if you'd like to ask a question.

A pause your GSM moment without everyone an opportunity to take our first question from Richard Evans with Mara River Capital Management, I need to speak to disclose that the absolute dollar level is so that you had in the digital business card for the year into the quarter. Yeah, we do not disclose those those absolute values that we have. That's just not something that we put those numbers out. What was the name the vehicle able to call you guys and just for the quarter. I apologize. I'm having a little trouble hearing your question.

So I just wondering if you could let us know what the growth rate from digital business was over the full year. I can just record it for.

Yeah, it was in the upper for the full year. It was in the upper single-digits. How should we think about the incremental margin drop through Thursday? We need to rapidly grow sales and not business, you know how much of additional dollar of sales turns into either cars and business grows.

Speaking about dtg2go specifically. Yes.

And can you just repeat your question? I'm sorry, if the question were not we're not hearing me very well. Okay, sorry about the incremental wage vary from additional, you know for each additional hundred dollars of sales from the vehicle business how much of that drops through to leave it.

Yeah, we've not we've not disclosed on the incremental but overall the dtg2go business is generating double-digit operating process and even down margins off on in the north of 20% ebitda margins. So the incremental and that's it over also incremental, you know, you can to know is is stronger than those numbers. I just float, Okay. Thank you.

Thank you, and I'll take our next question from that. They need help you with an advisor and group. Hi. Good afternoon. Everyone has you think about twenty twenty one month for your expectations for the distributor business and how you thinking about gross margin and the drivers there in 20 21 by each division. Thank you. I'll I'll kick off the answer to that Dana and yet with our distributor model business, you know, overall we are anticipating growth in a number of areas within that as you remember, we launched our distributor model right before COVID-19 it a lot of that business does come through the a special team promotional products industry, which happens to be the channel that had been hit harder than other channels in our activewear business, but we are re-launching on the

efforts on that

On some of the new business model that we talked about with retailers is certainly one that is is driving sales in those Source branded products as well. So we think that you know while we while we launched to that right to right before COVID-19.

Going to incrementally increase gross margins in that.

And the next occasion for holiday and how you're speaking about it.

Well, we are certainly prepared for a strong holiday season within dtg2go, you know, our customers are expecting to have strong strong busy during that, you know will we we're probably the best prepared we have ever been with all 9 locations more equipment online and Personnel ready to go home. There's always things that that you don't know that may come up but I would say that we we think we will have a strong holiday season and it will get kicked off exactly the week from now, so that's what we shall see.

Thank you. Take the next question from Jamie.

Great quote on the other day to go holiday business last year. We were impacted by many fewer shipping days than historically we would have we have a break for this year. So with capacity of 25% and with more shipping days one would expect that business to show without putting words in your mouth at least 25% growth months. You're over here in the fourth quarter.

And you know, I would agree with your your overall assessment. What we we would have expected more holiday production days this year than it actually came true based upon shipping cutoff with all the expected and anticipated e-commerce business. Certainly the freight carriers have hedged themselves for their boundaries and pushed their cut off a bit sooner. All that being said, we should have at least a couple more days than we did in the prior year. I think you know, we are poised for units on going out. I do want to remind everybody that you know, depending on the garments Chosen and come back with much more of those garments being Delta apparel garments, which is a wonderful thing from our profitability standpoint, but all of those factors play into the top left,

sales dollars

But we do believe that we will have nice strong growth during the holiday season great opportunities to leverage all the things we have put in place and looking for forward to a 16 the holiday historical you've had a little difficulty with finding sufficient employment page to to staff everything. I would assume issue might be a little easier.

And you know that that is what we we would have anticipated. It is fascinating to to to see out there that Staffing is not dead easier this year and it's probably tougher this year than it has in past years. I think that is coupled with with finding these people that that do actually want to be employed but more so coupled with everybody's e-commerce business is expected to be stronger and the seasonal Workforce is getting getting utilized across, you know, we do have some advantages because of how strong the business has been running over the last two quarters where we have been able to have steady staff support that business. So we think that will be an advantage to you know to us this year. So, you know, we we shall see how all of that comes through Thursday.

And your facilities are running efficiently and ready to go for the holiday season.

We are all we are all planned. We have half of our facilities are now located in integrated facilities, which makes it even more of the inventory. They're ready to go for that season, and we've got all of our our our staff is dedicated and ready to come in and hit the ground running with it. So we we do we look forward to it. We've been pretty much experiencing some holiday business for the last six months. So we are as prepared as as ever in our people in our life on in our inventory as well as with our technology advancements that we have implemented during the year. We we are anticipating a good holiday.

And your internalization rates are steadily throughout the year. Where do you think it will end up next year with current fiscal universes where we ended fiscal fly off?

Well, the good news is where we ended his full 20 is probably what was the goal to be at Twenty-One or twenty-two. So we have certainly outpaced our rate of utilizing agent of Delta garments far more than we anticipated when we started the year. So as we mentioned we were we utilized about 40% of Delta products in our fourth quarter and we would only see that expanding because of all the benefits that it offers to our customers, you know, a couple that with the tight supply of garments in the US this year. I think that also gives us an advantage because we already have that inventory there in waiting. So I think it's just has opportunities to expand from the 40% Mark and and keep growing north of that.

Okay.

Since the Hot Topic announcement as you seem to loot to other retailers have expressed an interest in doing some sort of a similar type operation with a cheetah go off. Are you talking to others right now?

We we definitely are talking to other retailers and actually other brands because the same model can work for retailers or four four brands that serve their Ecommerce and their own retail stores. So we look forward to being able to share some of those in coming quarters with you a lot of interests out there as we had anticipated and you know, we are working hard to to turn those into new customer launches.

Okay, shifting gears for a second said the man was was much stronger than you anticipated in in in basic business. I guess they're know family reunions. Nobody track record during the summer. No, pickleballtournaments know marathons. How was the man so much stronger if all those things that t-shirts are normally made for it didn't exist.

Hey, Jamie, I think if you look at Walmart's results this week and targets results, I believe today and their top of their apparel sales being so strong that those were huge drivers of it these new programs. We did was certain retailers about offering, you know, pre-packaged in a in a cube with licensed product in there, you know was a big part of it and I think the appetite for that. Is it really really large out there? I would just add one advertisement to your questions on dtg2go that you know what we've been doing so far. I'm really just the tip of the iceberg of the economic model that makes sense for digital printing and so the Hot Topic is an example of moving to a whole new level of understanding and sophistication that you know, a retailer can then sell a product before they have any cost invested in it and can offer a much wider array of products.

For sale and so, you know, it's been great and how these eCommerce sites sell t-shirts and us be the supply partner on that and the technology partner on that but the fact of the matter is that it's a tiny bit of the decorated t-shirt and and police Market in this country and around the world. So it's really encouraging to me to see some major retailers starting to understand that economic model for them. And I think would be a huge driver of growth in the future outstanding balance sheet items inventories are way down. Where would you like to be when you when next year? We can't run it that level again 3, I assume even though it's just create a nice operating margins.

you're right inventory is

Lower than we where we would like it to be that you know being said it has been driven by our our rapid ramp-up in our production that then we sold right out the door as soon as we were able to manufacture that that's a nice place to be however during this quarter as we speak right now historically we would be building our inventory levels off in anticipation of having the inventory to sell in the spring and the cuz we're turning that so quickly right now that is not happening. So we we think that's that's why we have you know already announced that we will be further expanding our manufacturing output because we do need to get to the the the point of having more inventory to service club and that we feel ultimately will be out there. So I would expect to end next year with more inventory than we did this year on and it's quite a bit more but no

Instead we have also learned of of how to turn inventory quicker and increase that certain parts of our business that are growing wage, you know, very high inventory turns on them. So I think you'll see our our inventory turns improving as we go through this upcoming year and into the future as well. But the actual total dollars of inventory, we would expect to increase but maybe not to the level that we have seen in past prior years.

You're increasing sales, but you took a lot out of those. Is that a permanent reduction?

I would say there's certainly aspects of that that are permanent reductions. I don't think you're going to see every quarter at the you know, percentage of sales of sg&a in this fourth quarter, but we could definitely you know have taken out certain thoughts that we do not anticipate coming back in certain variable costs and variable selling costs, you know, well, we'll continue to expand as as we get some sales growth and returned to you know, more of the marketing aspects that we have done in the past that I I'd say you should continue to see benefits coming in sg&a one area in particular is certainly in the Delta Group as we continue to leverage to gather our Sophie brand within the acting business and make that a much more efficient on you know, business and reduce those costs by utilizing a joined a team with the active or business and Thursday.

Would would certainly be permanent reductions in our overall cost structure. Just want to say what a wonderful job you've done is positioning the company for breath and thanks.

Thank you. We'll take our next question from that shorts with my investments.

Thanks for taking my question. I said a couple of pallets on the outside wanted I know you had talked about three million dollars of additional cost for the fourth quarter for Thursday. Can you to tell me when it what ended up happening with that how much additional pressure there was on the quarter?

Yes, so that's what I had mentioned earlier that that yes, we had anticipated that being about two to three million. But because we were able to start up those manufacturing operations. So rapidly wage and I had of our expectations. We actually only took about two hundred thousand dollars of it. All of the numbers that we have said in our faith in our press release are reported numbers. So the additional $200,000 of start-up costs are already included in that they're not they're not adjusted out but it was a nice a nice Improvement compared to where we thought because we didn't have to incur those additional costs that we originally thought might happen. Okay. Thanks and then being such a big piece of of your growth engine on a go-forward basis. I know you haven't given the incremental real birth.

Go through related to that question earlier, but can you just talk about how much sg&a there is associated with that business because it seems like we're dead at this inflection point where now you're starting to generate sg&a leverage and reach you did in the fourth quarter, and I'm trying to gauge, you know, if that's going to be a big driver for operating leverage off.

Yeah, and let me you know, maybe give a little bit more commentary around that first of all, the dtg2go business has very low as you can see on you know, we've talked about the gross margins in that business being you know about where we are on an overall gross margin level within the company, but there's next to no sg&a costs in it, which is why I can generate double-digit operating profits the The major portion of the cost that we have in that business outside of the variable labor costs money is really the equipment. And so, you know, when you think about us being able to leverage that and have less of a seasonal business and a strong fourth-quarter, we're we're utilizing that equipment during the whole year. You can then, you know inherently determine that the incremental profit from that

Are very very strong?

All right. Thank you very much.

And can't look at that star one. It's like to ask a question while you're next from Philip vocal with the advisors.

Hello, this is Belle photo. How's it going Deb?

Very good. Thank you and you can you hear me? Okay? Yes I can. Okay. Great. Yeah, I just want to ask a couple of questions. Congratulations. That's not the best one the best you've had and I just I just want to push you just a little bit and if you could give us more color on revenues and earnings next year. I mean you guys have a very small stock or not that many people covering it so it'd be very helpful to investors and the broader Community to to give us a little more color and cuz I put some very simple assumptions for next year and I come up with CPS of $200 to $3. Not that I'm expecting a comment on that. But if you could at least give us go through and what we're expecting on revenues and and and some commentary on Thursday, so it's not a complete mystery. So, you know, I think that the big question is is the big unknowns as we sit here today with you know, the pandemic still going home.

And you know, whether events around the world that have disrupted, you know manufacturing and people's normal Lifestyles. I think right this minute. We don't know what normal is wage, which makes us hesitant to you know project how results will be I would say, you know from my standpoint. If you look at the course of the next twelve months or really even say through calendar, you know, twenty one. So the next 5 quarters, we see strong demand for basic activewear appears in general with a limited supply chain that is not up to the levels. It was a year ago. We feel good about very good job. In fact about what our manufacturing teams have done the speed. They were able to start back up and the efficiencies they were running before the countries, you know forced us to Thursday.

Now we're very very pleasantly surprised at the efficiency that they started up and be enthusiasm for our Workforce and Honduras and El Salvador or Mexico to want it to return to work. It was obvious, you know, because of a lot of different reasons and normally when they come back there is a startup you'd of, you know, four to six weeks to regain their productivity, but they virtually came back and operated at full productivity, you know week one so that gives us a lot of confidence that will be able to ramp up manufacturing output to all-time record levels in Delta apparel over the course of the next, you know ten to twelve months and we think that the man will be there in general and we think it was specifically be there for how we operate and the various value-adding services that we can supply with offshore into domestic screen off.

training with retail put up and

DTG to go digital print this and so we see that demand strong and I think we will generally be limited in Revenue by what we can produce and deliver to come back short of some huge economic downfall through whatever, you know reason it be and and then last month.

Yeah, I think the same thing for salt like we saw consumers, you know really flock to doing outdoor activities and obviously a number of our wholesale customers who are retail jobs have been damaged by the pandemic and the you know, the impact on their business and we will have to see how all that you know plays out but the demand for our birthday is evidence people coming to our sights buying to our sites wanted to engage with us, you know is at a level that's been unprecedented. So anyway, we felt real good about the fundamentals of this thing will just to see quarterback water what the opportunities are. But, you know, we're ready to take advantage of them. Now. I see that I mean you guys are basically sold out TT to go and and everything's firing seemingly on on all cylinders and that's that's great. I just I think would be useful to give the market and more common to agent.

You know, I guess specifically like going into next quarter. You said you basically the capacity constraints. So is it outrageous to assume continued teaching them to go growth and and the current sort of range as well as the rest of the the group on a year-over-year basis you may have to 10% plus range and if it's a public company or is that too far am I pushing me too far?

I think it's just too soon for us to tell quite frankly about you know, production rates and you know exactly how the holiday season will will play out. But you know, if you look at over the course of the year, we certainly would you know expect you know growth in the back half of the year to be that those levels are high.

And and at the front end of the year you're saying you don't have the do you have the ability to have that sort of growth or capacity constrained? You know, you're you know, you're you're constrained at a certain age.

And we're definitely capacity constrained, you know right now and it'll just be how we can match up our production rates and you know with customer needs and I'll take to see if we're you know flat or up a little bit or down a little bit but uh, you know, we certainly expect as they have to say in earlier to have you know, a solid, you know, our first quarter is our weakest quarter typically in sales in earnings money, you know and starts Rollin II feel every why we think they'll get the year off to a solid start, you know short of some, you know, Major Impact of you know, either the the pandemic or you know, or their main Stacks great. That's great. Everything is moving in your favorite just capacity screen with margins dramatically increasing and I think we all we all can agree that your stock traumatically undervalued for just looking at private values of dtg2go probably arguably with twice the value your stock alone that being said if the value is

And realized in the stock. Would you be willing to sell or spin off or do some sort of financial restructuring to realize that that value whether you sell off the company?

Did you figure I don't know, but I'm just wondering if that's on the table. Currently. We are always focused on doing what's best for shareholders, and I doubt there's any two ends of life. You have more their personal net worth tied up in Delta stock than that, Maryland Bob humphris, trust me. We pay attention. I'm getting there myself to home, but great job great great job just quarter and and thank you very much, and we'll be in touch. Thank you.

Thank you. We'll take our next question from Chris Reynolds with neuberger Berman.

Good evening, and congratulations. Perfect quarter. I have yes, I have a question about the salt light retail expansion. It seems like this is a good opportunity to step up to pay for that. You know, I I think of someone like a tanker or or or rather, you know a retail owners that there's a lot of capacity out there and you know, could you get you really ramped at retail exposure up, you know faster than than what you've articulated on this call over the next year.

Well, you know it is a little tricky. We don't have deep expertise in retail operations. Like, you know, we do and some of our manufacturing operations and what-have-you, you know, they they are interesting in that they have high fixed costs high gross margins, but you know, once you cover that fixed cost and they are highly profitable operation so, you know, we get that basic math, if you pick bad locations, you know, they're not profitable and you're stuck with it for a while and so far. We've been a little bit surprised. Yeah, but you know these small owners and and Outlet owners willingness to negotiate better rent deals so far off now, so we're having those conversations, but our our salt light team does a great job of building out a gorgeous store. This will merchandise for not a lot of cap off.

If you look at what you know, our competitors are spending to do a store. So from my flexibility standpoint, if we can get locations to have the right grease, you know, we we could ramp up quicker Thursday. We open the store just a few weeks ago this industry school year and that was actually planned last year, but the mall had been shut down since we've got a couple bucks this year and you know, we'll just have to see how the year goes through. I'll have to say in Delta apparel. You know, we do multiple year budgets. We do poorly behaved we do annual budgets, but when we see an opportunity that we think we can take advantage of we don't wait till you know the next year to get here to do it. So, you know, we'll certainly take advantage of that page and continue to be very encouraged at the consumer engagement that salt life and how that expanding regionally, you know, really across the country. So the more that wage

fans the more opportunity we have for a you know expansion of

Geographic footprint that we can put us the store location in

yes. Thank you.

Okay, give me at this time. It appears around no additional questions in the queue.

Okay. Well, thank you very much. We appreciate your interest in our company joining the call and your your questions and we'll look forward to talking to you took a few months about our first quarter results. Thank you very much.

Thank you. That does conclude today's conference. Thank you for your participation. You mean I disconnect wage.