Q3 2021 Delta Apparel Inc Earnings Call
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Thank you and good afternoon for everyone participating on the Delta apparel fiscal 2020, 1 third quarter earnings call.
Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer, Deb Merrill Chief Financial Officer, and President of Delta Group.
Before we begin I'd like to remind everyone that during the course of this conference call projections or other forward looking statements may be made by delta apparel of executives.
Such projections and statements suggest prediction and involve risk and uncertainty and 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.
These documents identify important factors that could cause actual results to differ materially from those contained and the projections or forward looking statements.
Please note that any forward looking statements are made only as of today and except as required by law. The company does not commit to update or revise any forward looking statements. Even if it becomes apparent that any projected results will not be realized.
As a reminder, today's call will is being recorded and I would now turn the call over to Delta's, Chairman and Chief Executive Officer, Bob Humphreys.
Good afternoon, and thank you for joining us on our fiscal 2021 third quarter earnings call.
As you saw on our press release. This afternoon, and we're very pleased to have delivered record earnings for our shareholders with diluted EPS of $1.14 per share.
I want to thank all of our teams for their hard work and dedication, which has led us to our continued strong performance throughout the year.
And im, particularly pleased with the adaptability and flexibility of our teams have demonstrated as we have successfully streamlined our organization and continue to integrate new and innovative technology into our business.
Our teams overcame many challenges, including inventory constraints and U S labor shortages and delivered solid top line revenue and double digit operating margins.
Over the last several years consumer trends have been favorable towards active apparel from athletic wear athleisure and the most recent pandemic is only accentuated the trend was more people working from home and enjoying the outdoors.
Add to this recent tariff policies and the international trade uncertainties, along with supply chain disruptions and the result is more companies are seeking onshore and nearshore sourcing strategies than ever before.
Global and regional brands as well as retailers are looking for the full package supply chain that we can provide with our western hemisphere manufacturing platform.
Over the past 10 years, we have continued to invest in our manufacturing platform to increase the flexibility of our manufacturing capabilities and expand our capacity and most recently, we are producing more product than ever before.
As we see the market trends with demand outpacing capacity, we have already made investment commitments to further increase production capacity.
And expect this new production to be Ola and in the back half of fiscal 2022.
Our performance during the quarter highlights the benefits of our broad channels of distribution and the demand and the market for the unique products and services, we offer and the efficiencies we can achieve with our vertical integration operations.
We believe the strong foundation, we have in place coupled with our ongoing strategic initiatives positions us well for continued growth and strong operating margin performance going forward let.
Let me now turn the call over to Deb Merrill who will review, our third quarter business highlights and financial results All day and rejoin when we open the call up to questions Deb. Thank you Bob.
Echo Bob's comments, we are certainly very proud of our third quarter results and the great strides we have made within the business to position us well for long term success for.
For the third quarter, we delivered growth of 65 per cent compared to the prior year when our operations were significantly disrupted by the COVID-19 pandemic. However, we believe it is more meaningful that are sales grew 9% compared to the March quarter and were relatively flat compared to the same June quarter in fiscal 2009.
The team despite the supply chain and labor challenges, we have faced this year.
Our salt life business exceeded all expectations with growth of over 35% compared to the same quarter and fiscal 19, and importantly, with the 150% growth and our direct to consumer channels.
This was an extraordinary quarter across many fronts and it reflects the culmination of our multi year strategic initiatives coming to realization.
The profitability on our current year sales is greatly expanded driven by our margin moving sales strategies manufacturing efficiencies and continued spending controls.
We delivered diluted earnings per share of $1.14, a record quarter for Delta apparel, representing over 60 per cent growth and EPS compared to our 2019 June quarter with 70 since the earnings per share.
We are entering fiscal 'twenty 'twenty 2 of streamlined organization with the Delta Group segment operating as a fully integrated activewear business powered by our D. T. G to go digital fulfillment solutions. Our activewear business is now organized around our key customer channels operating as Delta direct.
Formerly our catalog business and global brands and retail direct formally discussed as our private label or fun Tees business.
Customers seeking our portfolio of Delta Delta Platinum Sophie and our force branded products can purchase them directly from our Delta direct business and Delta direct do we cater to a broad range of distribution channels spanning regional screen printers AD specialty and promotional E retailers and the resort and team dealers Delta.
The direct also services the retail licensing channel, where our customers are servicing mid tier and mass retailers with this channel driving strong sales and our June quarter as well as earlier in the year.
As a reminder, our June quarter is typically our scene of seasonally strongest quarter for Delta direct we entered the season with 49 million or about 25% less inventory than in the prior year, which constrained our ability to service the strong demand we saw on the market. However, even with 25 per.
The scent less inventory our sales results were only slightly below our 2019 June quarter results.
Although we remain inventory constrained and the near term and this at once business. We are working diligently to serve our customers' needs and ultimately rebuild of our inventory levels for future opportunities.
As discussed on previous calls our manufacturing teams have done an amazing job and increasing production output and we continue to produce at record levels within our manufacturing platform.
As we progress through fiscal 2020, 2 we're planning and capital investments to further increase production capacity, but also provide additional capabilities to further expand the flexibility of our manufacturing operation, allowing us to offer more innovative products to our customers.
And our global brands and retail direct business, where supply chain partner to global brands from development of custom garments to shipment of their branded products with the majority of products being sold with value added services. We also service global retailers by providing our portfolio of Delta Delta platinum and Sophie products directly to.
Of the retail stores and through their e-commerce channels, the strength of our global brands and retail direct business as demonstrated by the growth and sales compared to the pre pandemic June 2019 quarter and are on track to deliver all time record sales and this business in fiscal 2020.1.
This refreshed organizational structure, which includes the integration of our Sophie business in the Activewear has led to a more customer centric sales and support team of more proactive manufacturing inventory planning and distribution network and a streamlined back office support function, while we incurred onetime costs of this year too.
Facilitate this integration of approximately 8 cents per share of which <unk> was incurred in the June quarter, We anticipate annual benefits from the integration initiative and the range of 12 to 15 per diluted share beginning in fiscal 2020.2.
Our digital print business D. T. G to go remains of competitive force and the digital print and fulfillment market, which is poised to expand rapidly and the coming years. We believe we are differentiated in this market considering our vertically integrated supply chain broad geographic network for fulfillment and distribution and proprietary technology.
And broad and diverse customer relationships, we continue to see the interest of retailers and brands. Many of whom are current delta group customers to move to and on demand digital fulfillment model in fact D. T. G to go saw growth in the June quarter of over 70 per cent and the traditional retail channel compared to the prior year.
As a testament to the strategic advantage of D. T G to go and being a vertically integrated apparel supplier. We fulfilled 56 per cent of digitally printed orders utilizing a delta garment. This is significantly above the 30% delta of blank fulfillment and the prior year third quarter and ahead of the 50%.
Alta utilization and the March 2021 quarter. This trend is promising as it creates a more efficient operation reduces garment costs for our customers and lower working capital needs in this business.
D T. G to go started the quarter strong with new customers coming on board to the platform and increased production from existing customers. We experienced temporary disruptions as a result of labor shortages to meet the surge in orders received resulting in a 4% decrease and units produced compared to the June quarter of fiscal 2019.
Yeah.
Following the implementation of additional incentive pay programs during the quarter, we anticipate a better balance of production labor to service the demand, we see and the market.
We also continued to add more technology tools to streamline the fulfillment process increase efficiencies and better serve our customers with these tools and the additional equipment. We plan to add we anticipate being able to service about 30% more orders than a year ago.
Turning to salt life enthusiasts continue to actively engage with our brand.
Boeing Salt life's true omni channel strength sales grew over 35 per cent compared to the 2019 June quarter with at least double digit growth for each of our wholesale retail and e-commerce channels.
Direct to consumer sales now make up approximately 1 third of total sales, making great progress towards our goal of 2 thirds top line contributions from direct to consumer channels.
Sales at our branded Salt life retail doors grew over 250 per cent compared to the 2019 June quarter with particular strength in key vacation destinations.
This is even more impressive considering and certain locations, we are having to reduce the hours of the stores are open because of labor shortages.
With such positive momentum and our retail performance, we will soon be opening our new salt life stores, and Myrtle Beach, South Carolina as well as our first store in Texas, which will be near golf near Galveston, and we're excited to the accelerating our retail strategic initiatives with plans to now open at least 5 new salt life retail locations and.
2022.
Salt life enthusiastic we're also actively engaged with the brand through all of our online channels. During the quarter, we have harnessed not just the capabilities of our internal marketing team, but also the authentic experiences of our salt life team members, who are some of the best fishing diving and surfing.
<unk> fleets, who truly live the salt life every day.
We produce new content for social media for our 1 and a half million strong followers viewership of salt life content on our Youtube channel increased about 30% for the June quarter. This year compared to the March quarter with minutes watched increasing 40 per cent as we have extended our video lengths while growing the.
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Following the launch of the daily Salt online publication in March on our Salt life website, we have since increased the frequency of content publications as well as launched of weekly podcast above and below.
This engaging social and email and web content ecosystem helps drive over 65% of E Commerce sales in the June quarter compared to fiscal 2019.
Now I'll go through a more detailed review of our third quarter financial results for our fiscal 2021 June quarter, we delivered sales of $118.7 million and increase of 65% compared to our third quarter of fiscal 2020, given the impact of COVID-19 on our business in fiscal 'twenty I'll focus the discussion.
<unk> on our results compared to the June.
Third to the June 2019 quarter.
June 2021 quarter sales were relatively flat compared to the June 2019 quarter, driven by a 36% increase and net sales and the Salt life group, which was particular, which was partially offset by a 5% decline and net sales and the Delta group with both segments exceeding internal sales expectations.
Gross profit for the period was $30.2 million, a 22% increase from $24.8 million and the third quarter of fiscal 2019.
Gross margin increased 470 basis points to 25, and 5% versus 28% and 2019, driven by the stronger mix of direct to consumer sales and salt life and the benefit of higher selling prices in advance of higher product costs flowing through cost of sales.
Selling general and administrative expenses were $19.9 million or 16, 8% of sales compared to $17.9 million and the third quarter of fiscal 19 or 15% of sales the increase in SG&A, primarily relates to higher incentive pay expense consistent with increases and profitability.
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Operating income for the quarter increased 42, 8% to $11.9 million or 10% of sales compared to $8.3 million or 7% of sales and the third quarter of fiscal 19 the <unk>.
Third quarter fiscal 2021 results included $1.2 million of income related to the reduction of fair value of the contingent earn out liability from the D. T G to go acquisition.
The third quarter fiscal 19 results included a gain of $1.3 million related to the settlement of a commercial litigation matter.
Net income for the quarter was $8.2 million or of $1.14 per diluted share compared to $4.9 million or <unk> 70 per share and the third quarter of fiscal 19 and adjust.
Adjusted earnings per diluted share for the third quarter of fiscal 2021 with the dollar 1 and increase of 68% compared to the adjusted EPS of <unk> 60, <unk> and the third quarter of 2019.
Our balance sheet remains strong with total inventory of $152.3 million as of June 2021 down $5.7 million from a year ago and up $3.8 million from March 2021, and.
As previously noted we are manufacturing at all time record levels to build the inventory to service the market demand for our products.
On the inventory constraints, we have learned over the last several quarters, how to operate more efficiently and with less inventory with that said with our increased production, we see our inventory position improving each quarter and expect to reach our new normalized levels by spring 2022.
Total net debt, including capital lease financing and cash on hand was $132.3 million as of June 2021, representing a 4.8.
$8 million increase and net debt levels, a year ago and of $2.9 million decrease from net debt levels and March of 2021.
And we spent approximately $3.2 million on capital expenditures during the third quarter of fiscal 2021 and continue to expect total capital expenditures in fiscal 2021 to be about $20 million.
Looking to our September quarter as a reminder, the prior year September quarter had an additional week as 2020 was a 53 week fiscal year and.
After adjusting for the prior year additional week of sales, we would anticipate our 2021 September quarter to see growth of mid single digits. We believe demand for our products will be much higher but inventory will not be available to meet these demands.
As mentioned in prior calls our September quarter, we will have higher product costs flowing through cost of sales.
This will put pressure on on our gross margins compared to our recent quarter, we believe that our margin enhancing strategies, coupled with being a more efficient company should allow operating margins to remain strong and approximate that of the March 2021 quarter.
In summary, we're very pleased with our performance to date and believe despite ongoing macro headwinds we that we can continue to be well positioned for growth and improved profitability in fiscal 2022 and beyond and.
And now we'll be glad to open up the call for any questions.
Thank you if you would like to ask a question on the phone lines. Today, you can press star 1 on your telephone keypad. If you are on a speaker phone. Please make sure. Your me of options turned off to allow your signal to reach our equipment.
And once again, everyone that the star 1 on your telephone.
Okay.
We will take a question from Dana Telsey with Telsey group.
Please go ahead hi, good good.
Good afternoon, everyone and nice to see the solid progress on Salt life, and just wanted to unpack the Delta group of a little bit more.
It sounds like and.
Inventory shortages.
Leading to the inability to meet demand.
Do you see inventory right sizing itself.
We'll be able to I just want to make sure I understand and clearly are you, saying that the operating margin and the September quarter will be similar to the 7% operating margin of the March 2000, and March 2nd quarter 2021.
So Dana I'll take those 2 questions. So yes on your second question and that's exactly what we're saying is that the September should approximate the March which was 7% so youre right on that.
And then as far as inventory is concerned yes, we would be saying exactly that that we think throughout this fiscal year inventory has constrained the ability to grow sales in the Delta group is stronger than we have been able to achieve because of that.
We are now producing at all time record production levels led of course that half the flow.
Flow back in to the U S and then be available for sale.
We've had strong sales, despite having 25% less inventory to just maintain the sales that we've been doing we're hoping to be gaining on our inventory levels and replenishing those each quarter. So hopefully each quarter that passes we will be on better inventory position.
And with the goal of being back to a normalized which would be our new normalize the level to start the spring 2022, selling season, which means really having that inventory in place by March to begin that spring selling season.
Got it and could you just give us an update on what you're seeing on the inflationary cycle, how you're thinking about price and how that's changing.
Yes.
The most every business right now I'm sure in America, we're seeing inflation.
It really started before the pandemic and we talked about that.
Pages and transportation cost.
And we're seeing it and all areas of our business.
The slowdowns and shipping.
The time on the water and.
And what have you. So we have had a number of price increases.
And the last 6 months.
And we would expect to see further increases and our selling prices. If these trends continue.
Got it.
Can you any color by channel, what Youre seeing wholesale and the sounds like salt life and their own retail stores has been doing very well any further update there on the channel performance.
So the salt life business channel performance has been strong and all 3 channels wholesale e-commerce and retail.
And the demand for the brand is really strong.
And we have enough retail stores now that people are seeing.
The product being really well merchandise of our same store sales are growing rapidly over the prior year.
And so it's really been nice to see you to have our product out there and telling our story and see how the omni channel is really work.
Our wholesale bookings for spring are up about 50% from what we saw this year, so still really strong demand and the wholesale market too.
Thank you.
As a reminder, everyone that of star 1 to ask a question and we'll pause.
For a moment.
Alright, we have a question from Jamie Wilen with Wilen management.
Thanks for all the talk of a quarter a couple of different areas. When you mentioned Sophie that it was going to be a sense of costs have we already.
And we hit the <unk> this quarter have we taken the other nikola or is that coming and the fourth quarter.
No thats already been incurred and the first and second quarter. So we have now completed that initiative and on should.
It should be.
And some amount of benefit and the fourth quarter, but really starting to flow all the way through starting in fiscal 2022 with that 12% to 15.
The increase in profitability from that initiative.
So thats going to start flowing through 3 to fourth quarter, beginning with the first quarter, whereas the backend loaded.
Yeah, none and <unk>.
A little bit will be back and because of course some of the it relates to distribution and the distribution costs, but there will be increases each quarter.
Okay.
On Torrey shortage that you have.
Most of this product is made and the Honduras.
That's correct.
Well, Mexico, Honduras and to some extent El Salvador, although most of that goes.
To the retailer or brand so there.
There is not an at once inventories there.
It seems like people were having difficulty getting inventory from China, but how does this flow through to the United States to go to you.
So every day.
And you'd have a shortage.
So none of that comes from China.
What we're talking about we are manufacturing over 90% of all of the governments that we sell and.
And so we're making more than we ever have.
And if we can sell more than we ever have and so.
Is the demand driven shortage to some degree, but then the supply chain to us.
The yarn for example is in very tight supply of driven by lack of workers and the U S.
But things like.
The label sewing threads boxes.
Everything that you can think of it ultimately comes into this are in tight supplies.
And then the shipping time from Central America to the U S has about doubled.
The last of.
8 weeks or so so while we have made more product.
We have of above will go on through our our shipping that.
We will be coming in and it has been coming in but that is extra of inventory kind of stagnant that we can't get out to our consumers with the same velocity that we have come to know.
Do you have the capability of increasing and your manufacturing production and Central America and.
And how much and will that be enough to satisfy your needs and how should we look at 2022 and 2023.
Yes.
Yes, we will be able to as Deb talked about we already have commitments for additional equipment coming in and go to probably add 5% to 7% unit production and basic Tees and fleece.
And that sort of thing.
You know I think we got to see what.
Post pandemic whenever that is and whenever we figure we're in post pandemic.
The demand is but I think we have seen some structural changes and.
On the marketplace and consumer behavior, and so I'm, probably more bullish now than I've ever been about the forward looking demand for the type of products that we make and for our supply chain to major retailers and major brands and the fact that while we were were very tough.
And on product.
And we have stayed and production, we stayed being able to service our customers and.
And our direct to.
Brands and retailers and service has been very high and so I think it's differentiated us in the marketplace to some degree and as we've been say and really for a couple of years now and these trends started before and so major brands major retailers and we're trying to bring more production into the same.
Misfire, and we started that and we're the leader with a lot of really the name brands.
And so this will allow them and give them the technology to be able to do that seamlessly and then have that seamlessly integrated into our DDG to go production. So that we can service those sales that they generate so we're excited to to get that launched in in the fourth quarter and.
And then to continue to see that grow and bring new opportunities to BTG to go.
You mentioned you brought on some additional traditional retail tranche could you quantify how many dreams of respectable size you brought on.
Oh, yes and as.
As far as servicing on.
Aren't retailers I mean, we've probably doubled what we are servicing on.
And so we'd probably double the quantity, which is then what generated that 70% not not just the increased by the increase of the existing 1 class on the new 1 that have now Jen and that 70% increase.
Okay and the real.
<unk> and should we call the topic can you talk about the the evolutionary and we're now stands.
Absolutely that continues to grow on and.
And in and of itself is supporting that growth that we on.
Yes.
The same kind of model that that hot topic is and just utilizing now.
Yeah, you know I don't know the any 1 copies of it 1 is that model you know, sometimes it's their systems and their strategy where their distribution centers are located but I think.
The most major retailers are either already are starting to embark on selling product, particularly through their E Commerce channel.
That are produced on digital printing and.
There is more and more conversations and some additional technology that we have and R&D that we have done that we think will lead to more in store replenishment of the digital printing as well.
Fantastic great quarter guys.
Thank you.
Alright, as a reminder, everyone Thats Star 1 we'll take our next question from Shawn Boyd with next Mark capital.
Yeah.
Thanks for taking the question can you hear me okay.
Yes, Sir.
Alright.
Just wanted to go back to 1 of the comments sort of I think 1 of the last comments on the script.
And we're talking about the inventory shortages and the.
The quarter, we are now and.
And talking about growth of mid single digits is that sequential or is that versus September 2019 quarter.
Yeah.
Yes, that's actually compared to you've got to take our fiscal 2020 quarter. Just this past years.
Year over year quarter, and adjust to that quarter for the it having an additional week and the quarter and then from that we would have mid single digit growth.
Correct and yes.
And as a reminder, as a reminder, as well fiscal 2020 quarter for the September quarter was much stronger than our fiscal 2019 quarter. So we saw a nice strong growth in that quarter last year.
And so that would then of course put on.
Even adjusting for that week, we will put our fiscal 2021 September quarter stronger than our 2019 quarter.
Okay.
Adjusted for that week of production on that 1.
And the extra week last year as of year over year.
Person.
That is correct.
Okay got it. So now we are working days of inventory shortage or the inventory constraints I should say.
And to December and into the December quarter. So can you give us a preliminary look as to what this looks like out into FY 'twenty, 2 and I'll kind of go back to I think in the past, we've talked about sort of high single digit growth, 7% to 10% of kind of annual growth from the company on an overall.
Basis could you speak to that a little bit or maybe even pull out salt life and just talk about Delta group given the deaths for the shortages of the constraints of unity occurring.
Yeah, and as opposed to kind of breaking that out we would just say that we would expect to see.
The growth at least in that range that you mentioned each quarter, but we do expect as we go through fiscal 2022 that every quarter, we will be able to see growth as compared to fiscal 2021 on.
In those upper upper single to low double digit growth rates.
Uh huh.
And it's really not affecting the the gross margins, although if we had more product we'd be lever in our costs of that would ultimately help that a little bit but gross margins is a function of higher cost products starting to flow through inventory and the timing of price increases.
And different channels of distribution, but still strong gross margins for us, but not quite as strong as we achieved this past quarter.
Got it got it okay.
Last 1 from me is just focusing on the answer.
Salt life for a second.
Seems like where we're at.
And the ramming speed so to speak this is really kind of break it out a little bit the business was I don't know high Thirty's last year and that was the pandemic here. So maybe we need to back up to $2019.43 million business youre going to be exceeding that substantially here of this year.
Where do we go on and how Big does this look to you all kind of a couple of years down the road how big is it in terms of retail stores.
What percentage of the business would be direct commerce direct to consumer E. Commerce, just trying to understand a little bit more on salt life and particular.
Yes.
So.
If you look back 2 years, and we had about 35% growth so it kind of slight.
Slightly above that rate that we've been saying that our goal was to go to grow salt life at 10% of year and obviously, we had the pandemic youre in there, but looking back we've obviously done that I think the most exciting thing or a very exciting thing is we've.
We've got the proof of concept now of our retail store rollout and so our first few stores were marketing pieces.
And this year, we won't have that spike this year, we take that quarter out we're still growing that business nicely.
And what's really exciting is our social media channels are growing ebb and faster and really punching above the weight of salt life sales today.
Which just goes to show the consumer engagement and.
The desire for live and the Salt life and as we say, they're not at the beach thinking they want to be at the beach. So.
We do feel good about that and it does seem like we're getting to pace of growth now that's getting it to the next level.
And I would just for all of that all together to say as Bob mentioned Leah targeted this business to be at of compounded double digits of 10% of top line growth with the new doors that we are adding on in 2022 already on that should allow us team even exceed that on and of 2022 fiscal year.
And then to I'll quite all of the strong growth in the retail direct to consumer channel both E com and at the retail doors that also nicely expands the gross margins and that business as well and and then obviously it drops to the bottom line and operating margins. So all of those things.
Added up on.
Certainly allows us to to get to that that goal of the 10% top line and even exceed that and fiscal 2022.
Alright got it. Thank you very much of the color and.
Congrats on on a ton of great results on it very difficult operating environment.
Thank you.
And there are no further questions at this time and I would like to turn the call over to Bob Humphreys plenty of additional or closing remarks.
Okay, well. Thank you very much for your time and interest and Delta apparel and.
We only got about 8 weeks to go to finish the fiscal year sort of believe of Fastly click bar, but we'll look forward to update you and a few months on the full year results and our fourth quarter. Thanks.
Thanks for your interest.
And that does conclude today's presentation. Thank you for your participation you may now disconnect.