Q2 2021 Delta Apparel Inc Earnings Call
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You are still currently on hold for this delta apparel of fiscal 2021 second quarter earnings conference at the.
Each time, we are still assembling today's audience, how many do you plan to be on the way very shortly so thank you for your patience and please for Panama.
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Thank you and good afternoon to everyone for participating in Delta apparel, the fiscal 2021 second quarter earnings Conference call.
Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer, Deb Merrill Chief Financial Officer and President.
The Delta group, John Hester, Chief Accounting Officer, before we begin I would like to remind everyone that joined the course of this conference call projections or other forward looking statements may be made by Delta apparel as executives so much of it.
The actions of the statements suggest predictions and involve risk and uncertainty and the actual results may differ materially.
Please refer to the periodic reports filed with the Securities and Exchange Commission, including the company's most recent form 10-K and form 10-Q filed today.
Let's identify important factors that could cause actual results to differ materially from those contained in the projections or forward looking statements. Please note that any forward looking statements are made only as of today and the task.
As required by law the company does not commit to update or revise any forward looking statements. Even if the becomes apparent that any projected results will not be released as a reminder, today's conference is being recorded I will now turn the call over to Delta as Chairman and Chief Bob Humphreys. Please go ahead.
Good afternoon, and thank you for joining us on our fiscal 2021 second quarter earnings call.
<unk> cited about our performance this quarter non proud of our team's continued hard work to cultivate and service the broad based demand we see in the many markets we serve.
We are achieving and in many cases exceeding the results we expected from numerous growth initiatives, we launched and believe these will continue to drive value for our stakeholders in the coming quarters and years.
Let me go ahead in terms of the discussions over to Deb Merrill who will go through our business highlights and the John Hester, who will follow with a review of our financial results how will the enjoined them. When we open the call up the questions debt.
Thank you Bob we are indeed, very proud of our second quarter performance as we continued to deliver result, the outpaced our expectation.
Our second quarter results reflect strong broad based demand across our product line, coupled with significant earnings expansion as we continue to drive the efficiency throughout our operating cost model.
We achieved second quarter sales growth of 12% with double digit growth in both our Delta group and Salt Lake Group segment. These were outstanding result, as we capped off a stronger than expected first half performance in which we delivered sales growth of six per cent for the first six months of fiscal 2021 well.
Ahead of our earlier expectation for sales contractions or at the flat to prior year.
With regards to profitability, we delivered earnings of 66 cents per diluted share well ahead of last year's reported EPS of 19% and adjusted EPS of <unk> 39 of that.
The strong second quarter performance is a true testament to our team's unwavering dedication to servicing our diverse sales channel a reflection of our world class manufacturing capabilities and most importantly, the flexibility of our business model as we look for the remainder of the year I am confident in our ability to drive.
The.
The strong top and bottom line growth.
Turning first to our Delta group segment sales growth was led by the demand for activewear apparel, particularly with our retail direct customers and with the global and regional brands that utilize our full service supply chain.
We are there every step of the way for these customers from product development. The shipment of the branded products with the majority of products being sold fully decorated and ready for the retail shops.
Over the last several years, we have broadened our customer base and expanded our product capabilities and we're seeing these benefits with 40% year over year sales growth this quarter in the sales channel.
Global trade uncertainty and the need for shorter lead times and now the effects caused by the pandemic has led most businesses to reevaluate the reliability of their supply chain. We firmly believe that our flexible full service approach utilizing our sophisticated business system and our nearshore and onshore.
Our manufacturing capabilities, the delta apparel and ideal supply chain partner.
We are seeing continued business opportunities with expanded program for our existing customers along with business from new partners interested in utilizing our services.
We remain encouraged by the accelerating adoption of our products and services in the direct to retail channel.
Utilizing our offshore manufacturing along with our U S decoration and packing operations, we have been able to deliver quick turn fully stocked graphic tee pallet displays to retailer, which have performed extremely well at retail and have led to the ongoing fulfillment and new programs as we progress through the year.
We're very proud of our ability to drive performance in our catalog business. Despite the inventory constraints, we're working through.
Our teams worked exceptionally hard to accelerate the ramp up of production to all time record level. We are ahead of our initial goals and are now producing more dozens of weak within our internal manufacturing platform than ever before in our history.
The <unk> integration remains on track for completion by the end of the fiscal year.
As a reminder, in January we kicked off the integration does the.
Into our Delta Activewear sales and inventory business system added the complete soup the lineup for the Delta would be the E Commerce site as well as launched a new consumer Sophie Dotcom site directly integrated with the active wear ERP platform.
This is the led to a better customer experience and improved inventory management.
Now operating with integrated sales and marketing team, we have already successfully launched several targeted social media advertising campaign showcasing the broad range of Delta So the in source branded products bring.
Together, both Delta and <unk> under one integrated Activewear umbrella is a win win for both of our customers and for Delta apparel.
We have set the stage to come to.
To expand our market reach while simultaneously enhancing our margin potential.
We are in the process of relocating the majority of Sophie inventory to a new fully integrated Phoenix distribution Center, where we will be servicing Sophie product on a go forward basis.
The military business will continue to be serviced from our North Carolina production and distribution facility.
As we mentioned on our December quarter call.
With the Sanofi transition into the Delta platform, we expecting to see incremental expenses of about <unk> <unk> per diluted share in the March quarter.
We are on pace to meet our completion timeline, we were able to lessen the impact of the in the March quarter and spreads some for the June quarter, where we believe the expense will be substantially offset by cost savings from the integrated facility.
Importantly, we continue to anticipate the annual benefit from this integration initiatives in the range of 12 to 15.
Beginning in fiscal 2022.
Looking at our D. C. G to go business, we had a slower start for the quarter, but ended the period on the strong note with March unit growth up in the double digits the Earth.
Early softness in the market was experienced across our customer base as consumer sentiment was hesitant, but the uncertainty surrounding the COVID-19 pandemic, the stimulus packages and unemployment rates and related is that.
Also as the traditional retail channel became more prominent in our D. C. G to go business net we've continued to build the greater understanding for the seasonality of the business trends with the post holiday lull, having a larger impact than originally anticipated early in the quarter.
As we closed out the March quarter, and continuing into April and May we have seen a resurgence in orders coming from existing customers as well as newly launched partners. Many of whom are forecasting to do significant volume with us as they ramp up.
The traditional retail channel continues to grow with more than triple the units shipped compared to the prior year quarter.
We continue to see this channel of distribution as a significant future growth opportunity for <unk> to go, especially with our new strategic partnership with Dallas based auto scaled out AI, whose technology automates the product design marketplace listing and advertising management for on demand retail.
We believe that one of the headwinds with the growth of the on demand retail has been the time and energy to take graphic library and turn them into online product listing available for sale to consumers on limitless garment styles and colors and across multiple marketplaces.
For the BTG to goes on demand supply chain takes care of everything once the consumer buys the product we wanted to expand our solution to give customers the tools to quickly and efficiently bring more graphic design for the on demand model.
Auto scale as the automation software that does exactly that bringing products to market faster with fewer resources.
We believe that combining BTG to go of on demand supply chain with auto scale design and automation technology will further revolutionize the on demand apparel retail.
Utilizing our proprietary technology and our expanding geographic network BCG to go is able to quickly and easily scale operations to support the rapidly growing on demand industry.
As we noted last quarter, we are now operating nine fulfillment facilities, including two locations recently opened in the December quarter.
One is the first in the industry are on demand D. C and the second is our new Phoenix, Arizona integrated distribution and fulfillment center.
With the Phoenix location, we operate five facility fully integrated with our Delta group distribution centers, providing a seamless supply of garments.
Eliminating a significant amount of non value added cost and further leveraging our facility cost.
Our customers continue to realize the benefit of the use of the Delta garments with DTC to goes usage of Delta catalog blanks, reaching a new record high of approximately 50% utilization in the March 2021 quarter compared to 30% in the prior year quarter.
This trend is promising as it creates a more efficient operation reduces garment costs for our customers and lower working capital needs of the business.
We will look to expand our networks through potential future D. C. D to go facilities within our remaining Delta D. C. The addition of new on demand D C and expansion into international markets.
With respect to our Salt life group as evidenced by the 15% second quarter sales growth demand for the Salt life brand remains very strong.
The salt life direct to consumer business more than doubled compared to last year led by branded retail store sales growth of 175% inclusive of same store sales gain of 25 per cent.
Our retail stores have continued to drive impressive results and we could not be more pleased with the outstanding performance at our new stores, including a thorough in Palm Beach gardens, as well as our locations in key vacation destinations, including Dustin Tampa key West in Daytona, Florida.
As we kick off the summer vacation season, we look forward to seeing consumers experience the lifestyle brands in person at our retail doors with new locations opening in Myrtle Beach, South Carolina, and then next in Texas.
Consumers also continue to actively engage with salt life, while online with e-commerce sales up over 40% for the period the <unk>.
<unk> of Salt life ecommerce business was driven by all around impressive kpis for the quarter, including 40% traffic growth in the first time salt life Dot com visitor growth of 35 per cent.
Consumers are spending more time on the site, which we believe is leading to growth in average order value compared to the same period last year.
They are also visiting more often than not on their mobile devices with over 70% of visitors and over half of purchases originating on their phones or tablets.
During the March quarter consumers also subscribe for themselves to our email list at a pace 75 per cent greater than the new email subscriptions in the March quarter last year.
This is important as about a quarter of all online sales of these last three months originated from the email channel, which bodes well for future growth.
We could not be more excited about the strength of the salt life brand and have invested in fueling the lifestyle brand growth with the launch of the daily Salt.
The team members Influencers and staff will showcase guide and demonstrate how to videos and provide exclusive of articles from the amazing destinations around the world covering anything you want to know about living in the salt life.
The daily Salt is another way, we are authentically engaging with enthusiasm for the brand and everything it represents.
We also engaged on multiple social media platforms, which saw a 10% year over year increase in followers for salt life, including the launch of our Salt life branded Linkedin page.
Notably our popular Youtube videos saw a sevenfold increase in viewership this quarter compared to last year. Since we began more actively promoting the channel on our website.
With the strong results from our retail and E. Commerce sites, we have increased our direct to consumer penetration to 25% of total sales from lack of from 15% last year.
This is meaningful growth for our strategy to ultimately achieve two thirds of mix of salt life's direct to consumer sales.
At the same time, our wholesale channel continues to perform well with our retail partners. We ended the second quarter with our largest order book on record for Salt life, which should lead the strong salt life sales for the back half of the year.
Our results showcased the benefits of our broad customer base and diversified channels of distribution and we believe the momentum is just beginning we're excited by the many opportunities we see for continued top and bottom line growth.
We now pass it to our Chief Accounting Officer, John faster for a more detailed review of our second quarter financial results John.
Yes.
Thank you Deb.
For fiscal 2021 second quarter, we delivered sales of $108 6 million of 12% increase compared to our March quarter of fiscal 2020.
This performance was driven by double digit growth across our two business segments with the Delta group segment up about 12% in the Salt life group segment up over 15%.
Gross margins increased 150 basis points to 22, 8% compared to 21, 3% last year and sequentially from 21, 4% in the December quarter.
Driven by a favorable product mix higher selling prices and manufacturing efficiencies and process improvements offset by inflationary cost increases and labor freight fuel and raw materials.
Just as we've been discussing inventory constraints as a headwind to growth the difficulty in obtaining labor in the U S has become a challenge as we were competing for labor against increased unemployment payments and other programs available to non working individuals.
These labor constraints impact for us across our businesses, including at our U S production facilities and in our distribution and retail stores.
So while sales dollars increased approximately $12 million compared to prior year, our selling general and administrative experience expenses decreased <unk> $8 million or 4%.
The savings are from cost reductions implemented during the pandemic for the continued including fewer administrative stuff reduced travel expenses and a more digitally focused sales and marketing strategy, which more than offset the additional cost incurred in the Delta group for the integration of Sophie and of the Activewear business.
Operating income for the quarter more than doubled to $7 $6 million or 7% of sales compared to $3 $6 million of three seven percentage of sales in the prior year.
Net income for the quarter was for $4 million or <unk> 62 cents per diluted share a significant increase of last year, and which reported net income was $1 $3 million or <unk> 19 per diluted share.
On the adjusted basis, excluding the impact from the prior year March quarter from the government mandated shutdowns in our offshore manufacturing as the pandemic began.
Earnings were <unk> 39 per diluted share.
With regards for our balance sheet of liquidity total inventory as of March 2021, with a $148 $5 million debt.
The $48 $8 million or 25% from a year ago as we enter our seasonally strongest quarter of the year.
As previously discussed the stronger than anticipated sales trends, we've seen over the past nine months.
Volume with the Hurricane disruptions experienced during the December quarter impacted our normal seasonal inventory build.
We are continuing to ramp up production at an accelerated pace and are already producing the all time record levels to replenish inventory to normalized levels before next year spring selling season.
Total net debt increased $5 4 million from December 2020 to $135 2 million as of March 2021, but it's down about $23 million from net debt levels a year ago.
Cash on hand, and availability under our U S revolving credit facility totaled $44 2 million as of March 2021, a $500000 increase from December 2020 and of $14 million.
Increase of approximately 50% increase from a year ago.
We spent approximately $1 5 million on capital expenditures during the March quarter compared to $4 $1 million a year ago, and we continue to expect capital expenditures in fiscal 2021 to be about $20 million.
Our focus is primarily on digital print expansions manufacturing of equipment to expand capacity and broaden our capabilities additional salt life retail store openings and business systems and technology advancements to enhance our operational efficiency.
Yeah.
As we look back on our business. We are now at the one year Mark from when the pandemic began disrupting our operations and those final weeks of March 2020.
I know, we all would never have guessed for the impact of us would've had on the world.
We are so pleased with the quick recovery, we have had in our business.
As we compare the performance of Delta apparel compared to pre pandemic fiscal year 2019, beginning of the September 2020 quarter and continuing through the first half of fiscal 2021, our revenue has been trending at or above the levels of fiscal 2019, including our <unk>.
March quarter being up approximately 6% compared to the fiscal 2019 quarter.
And even more importantly, we have achieved strong gross margin improvement and significant profitability expansion in the prior three quarters as compared to fiscal 2019.
So we would expect the same dynamics to continue in the back half of fiscal 2021, if we build on the momentum experienced the last three quarters while.
While the inventory constraints are a headwind to sequential top line growth in the June quarter, the should begin to ease in coming quarters as our record level of production output begins to build our inventory levels.
With respect to inventory. It is important to note is the cotton prices and other.
Other inflationary cost input cost are having a large impact on our product cost.
We will begin to sell through our higher cost inventory in the September quarter, which will put some pressure on gross margins compare to the March and anticipate the June quarter margins having.
Having said that we believed that our margin enhancing strategies, we put into place over the last several quarters.
The reductions we've achieved at SG&A expenses should allow operating margins to remain strong.
Let me now I'll turn the call back to the up for her final thoughts.
Thanks, John in summary, we could not be prouder of our performance to date for fiscal 2021 and are confident in our ability to continue to drive strong performance for the remainder of this year and beyond.
And now Bob will join Us and we will open the call for any questions.
Yeah.
Thank you. So if you would like to ask the question. Please stick and other pressing star one of your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question for you.
I'll now pause for a moment to allow everyone an opportunity for you to Cigna.
Perfect. Once again as a reminder, if you would like to ask the question. Please press Star one we will now take our first question from Dana Telsey Telsey advisor.
Always of regroup commodities. Please go ahead Sir.
Yeah.
Good afternoon, congratulations on the nice progress for the quarter and especially relative to 2019 also when you think about the growth initiatives that lie ahead, what was the certainly one of the things that was new is the new partnership with auto scale of that AI can you tell us how some of these partnerships the going the hot Todd.
The partnership how you see that leading to higher sales and margin opportunities go forward and then just a follow up.
Sure for Dana and as we mentioned you know our strategy around growing out the entire traditional kind of retail channel within D. T. D to go are going extremely well the.
Of the hot topic business is growing very very nicely and we're gaining new partners in that channel.
The new strategic partnership that we have with auto scale to.
The combined their technology into our operations I think will only enhance our ability to more quickly grow the traditional retail.
That's all because of what that provides us is in the ability to offer our customers.
Technology advancement.
That they can more quickly bring these listings to life.
You know, we've always talked about the endless supply of opportunities with the graphic library to.
To offer those products.
Across a vast number of garments.
And get those listings posted so consumers could could buy them and this technology will greatly items basically automates that entire process.
To bring more listings for light, which then ultimately will drive more consumers buying them.
And drive growth and then our digital print and fulfillment business. So we're most excited to be offering of these front end tools too.
To our customers to.
Enhance the and accelerate the growth of on demand.
As the way to grow business.
Got it and then as you think about commodity prices cotton costs. What are you seeing out there in the environment given we're hearing about inflation from raw materials and how do you expect inventories to progress going forward given the healthy demand for your product. Thank you.
Sure I'll take that one as well.
Chart with certainly on cotton prices have been volatile.
Oh on expected they'd be able to build back the unison inventory that we need to support the business as we go forward. We said that we we expect to be a bit inventory constrained in the next coming quarters I'm that should again start easing as each quarter goes by with the anticipation.
We will have on the inventories to support support growth that we we expect in the business as we get to the spring selling season of year for them now.
Yeah.
Thank you very much.
Thank you for me when they'll take the next question from Jamie worry too much for the management. Please go ahead.
Oh, the sticking with the inventory for sure can you anticipate the there'll be a bed of 20 million dollar sales impact and the March quarter due to the light inventory how are you ready for for overcome all of that.
Mhm.
And it gave me good call out on that on because this is now you know basically the second quarter in a row that we've overcome that headwind on and I think a lot of that comes from the efficiencies. We found in the business you know our our manufacturing team that is even more of a laser focus on manufacturing the.
Items that we need to support the business all of that being said and while we're most pleased with the growth that we did achieve in the March quarter. I think you would've seen even stronger growth have you had more inventory to support that so I think it's a combination of both of those and you know we certainly expect to continue to do the.
Same thing in the June and September quarters. It is a headwind, but we have been successful against that in the last two quarters.
You said your cost per unit in the inventory as high of your inventory is significantly lower.
Terms of how much how much lower range are you sure inventory level.
Mhm, Yeah, I think what we're saying.
Where would you like the inventory level to be right now.
Yeah, I would say you know and you seek right now our inventory costs on or you know I have not increased that much they will start increasing of for bringing in the higher raw materials into the production standpoint on you know kind of as we speak right now I was their inventory.
40 levels the unit that we do need more units.
But the good news is that we have have determined we don't need as much as we had so I would expect when we when we get back to the level of the need we will still be lower and both of our inventory unit and our inventory dollars than we were running pre pandemic levels the not quite as low as they are now, but we do.
Think we can grow the business and operate the business with growth opportunities with an left the inventory than we were running pre pandemic.
[noise] on the day to get you to go for <unk>, you mentioned in the hot topics growing nicely. Obviously this must be incremental profit for the retailer.
They're they're pleased with the progress.
Absolutely. They are continue to implement new initiatives and new things to continue to expand that but I think you know it has far exceeded their expectations on and ours from when we started doing business back with them and I think there's more great stuff to come from that partnership in relationships.
I think there's a lot of other retailers out there that are realizing the benefit from it as well and you know as I mentioned, our overall traditional retail business has grown nicely that comes from additional partnerships an additional platforms that are picking up these on demand lifting.
And so we we believe as we said before that this is.
You know really revolutionize of how that can be of he said, it's the kind of free growth for for all of them and I think of that channel is the one that just has tremendous opportunities.
On the.
The pushing more through an on demand model.
When you talk about gaining the partners from the channel or are you talking about similar situations to where you'd be in the house with a retailer.
I think ultimately yeah on as a reminder, we started doing business with hot topic, a couple of years prior to actually putting the facility.
And there's and so I think you're you're just seeing that same thing happened where people get onboard understand it grow their business get excited see the potential of it on and then we just want them to know where there for them when they're ready to put it and get the secondary benefits of having the it right there integrated with.
In their own distribution center. So it's really of service model on the quickly begin with them using our network of facilities and then ultimately give them the additional benefit that calm having their own operations in their distribution center.
Gotcha, unless we drove on Sophie obviously, you've changed the course structure. There so you'll have a better operating margins from the business, but the.
Ability to drive.
Increasing share all sorts of <unk>.
During the group the catalyst for moving forward just the new structure.
Help you do that have you seen any any difference and and what's sofas couple of line is looking like or will look like.
Yeah. The those are great questions on what we're doing is again not only setting it up from a cost standpoint, but also much more assistance to operate in service of our customers on and certainly that in and of itself on can can drive the additional <unk>.
Avenue, we spent for basically the last you know.
Geared of 15 months and integrating and working through our sales force channel.
And structure within our sales organization, along with our marketing and merchandising and E Commerce organization and so we think now with those are ready for that and then the operational improves.
Improvements in place that we are wrapping up right now and system that we have the the combination of those two will allow us to then focus on the sales growth and be able to achieve that as we go through 2022. So we're most excited.
About the the opportunities having the eyes on the state the brand.
And be able to you know start building back the revenue in that.
[noise] excellent that was the heck of a quarter of thanks for all of us.
Thank you.
Thank you so as a reminder, if you would like to ask the question. Please press star one.
Okay. So it looks like that is all of the questions. We have for now.
To turn the call back over to the speakers for on any additional narcose for Max.
Well. Thank you all for joining us today, and we'll look forward to the new call in about three months. The update you on our third for the results.
Thank you very much.
Thank you.
Thank you.
<unk>. Thank you for your participation you may not of disconnect.
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