Q3 2022 Delta Apparel Inc Earnings Call
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and welcome to the Delta apparel reports fiscal 2022 third quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
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I would now like to turn the conference over to Bob Humphrey. Please go ahead.
Good afternoon, and thank you for your interest in Delta apparel. We are pleased to be with you today to discuss our third quarter results. I would like to give special thanks to our over 9,100 employees throughout Mexico, Honduras, El Salvador, and the United States who continue to work hard to service our customers in the many operations that we have.
As reported in our earnings release, sales for our third quarter ended July 2, 2022, for $126.9 million of 7% from the prior year June quarter.
Our third quarter results reflect continued broad-based demand for our products, with the Delta Group segment delivering 3% growth over the prior year and the Salt Life segment registering 30% growth year over year.
In our Delta Group segment, we continue to benefit from our broad channels of distribution and so increase demand for both global grants and own demand digital print moderated by decline in our Delta Direct business.
Global Brands continues to expand revenue and unit growth while we provide a high service level to our customers with our expanded array of value added services.
Over time, we will migrate to more production to meet the demand we are seeing in this channel of business.
Our value proposition with multiple channels of distribution in our vertically integrated supply chain allows us to cater to our customer's needs.
We are also seeing continued revenue growth at DTG2Go.
The partnership with Fanatics continues to grow and we have now installed new digital print equipment in a fourth facility allowing us to be even closer to the end consumer and better serve to the important Northeast market.
We expect this growth to continue for the fourth quarter as we position ourselves for the holiday season.
We further leverage our vertically integrated supply chain by using Delta Direct Blanks in our DTG to go production, creating efficiencies within the business and for our customers.
We anticipate continued momentum in upcoming quarters as our own demand digital first solution brings on additional production to meet customer demand.
In our Delta Direct Business, we have seen the market decline for replenishment orders for mass channel active wear at large retailers, although it appears excess inventories are working their way through the channel.
The Salt Life segment registered very strong growth over the prior year, third quarter, with sales increasing 30%. We have seen strong results on both the retail and wholesale channels of distribution, and with a better inventory position, combined with an updated e-commerce site, we have seen a nice increase in web traffic over the previous quarter.
During the quarter, we expanded our Salt Life branded retail footprint with four new locations.
As we previously discussed in April , we opened stores in Foley, Alabama, and Hilton had South Carolina. And Hilton had South Carolina. And Hilton had South Carolina.
In May, we also open stores in Bucke River, Chicago on John'slle, Florida, and Rohaba Beach Delaware.
With these openings, we have achieved our initial fiscal 2022 goal, bringing the total number of retail doors to 20 locations across 7 states.
Our recent Salt Life Retail Location openings continue to meet our initial sales expectations validating the strength of the Salt Life brand.
We believe our Omni Channel strategy is working well for Salt Life and is building overall consumer demand for the brand.
While we are achieving positive sales results in our business, we are also actively managing cost pressures across all areas of our company.
We are being challenged on inflationary cost pressures, which we expect to continue for the foreseeable future.
We are managing capital deployed in our business by balancing additional capital expenditures to support growth while scheduling production to meet market demand.
We have completed our plans for the current fiscal year to install new digital print technology in four of our DTG2GO locations.
For Salt Life, we continue to explore new retail location opportunities while we have already met our target of 20 retail stores open by the end of fiscal 2022.
In the face of microeconomic headland and continued supply chain disruptions, our Brawl Channel's distribution allows us to continue to work together with large retail and global brand partners to seek the value added services we can uniquely provide.
Over the last several months, we have managed our commitment of July-based cotton contracts to reduce the amount of high-priced cotton to eventually flow through our cost of sales.
We have already decreased our production output and have reduced our planned operating schedule until late fall when lower price cotton will be available in the marketplace.
We expect these actions will reduce our units on hand to serve us the undecorated active-wear market.
Now let me turn the call over to Simone, who will review our third quarter financial results, and then I will rejoin the call prior to our opening for questions. Thank you.
Thank you both.
For our fiscal 2022 third quarter, we delivered sales of $126.9 million, a 7% increase over the prior year's third quarter.
The performance was driven by growth across both about business segments with the Delta Group segment up 3% and the Salt Life Group segment up 30%.
During the third quarter, Delta Group Net Fales grew to $106 million compared to $102.6 million in the prior year third quarter.
This growth was driven by global brands achieving an increase in revenue and unit sales. I lay down and? everyone was bringing back theNG That plan was given to the driver doing the same projects the recovery and unit sold.
At our on-demand digital print business, DTG2Go, sales and unit growth both increased from the previous quarter as we continue to make progress with our digital first strategy.
Average selling prices are increasing due to expanded service levels and more expensive garments.
We expect these trends to continue in the fourth quarter and into the next fiscal year.
The Salt Life Group's third quarter revenue grew 30% to $20.9 million, compared to $16.1 million in the third quarter of 2021. $1.1 million in the third quarter of 2021.
The segment's growth was driven by an over 40% increase in wholesale sales, combined with continued Salt Life brand and retail store sales growth.
Growth margins at Delta Parallel declined from the prior year's fiscal third quarter, while 130 basis points.
to 24.2% for the third quarter of fiscal 2022.
This decline was driven by inflationary cost pressures, including rising prices of cotton, energy, and continued labour cost pressures.
In the Delta Group's growth margins were 19.1% for the June 2022 quarter. A decline from the prior June quarter margins of 21.7%.
Rose margins were most negatively impacted by higher cost inventory flowing through cost of sales.
These costs include the rising cost of cotton, energy, dyes and chemicals and fraton wedges.
At DTG2Go, we expect to realise improved growth margins as we complete new digital print equipment installations.
and build production output and efficiency as we move into subsequent quarters.
The Salt Life Group segments growth margins improved to 50.2% in the third quarter of fiscal 2022 compared to 49.7% in the prior year third quarter.
resulting from a favourable mix of sales, including increased Salt Life branded retail store sales.
Next sales to Delta Parals for the first nine months of fiscal 2022 were $369.3 million and increase of 14.7% over the same period last year.
For the Delta group, net sales for the first nine months of fiscal 2022 were $323.3 million, an overall 14% increase over the same period in the prior year.
For salt life, in the first nine months of fiscal 2022, net sales were $46 million, up $8.4 million, or 22% from the prior year net sales of $37.6 million in the comparable period. In the last few months of fiscal 2020, net sales were $1 million, and the net sales were $1 million,
Growth margins in the Delta group to the first nine months of fiscal 2022 declined to 19.6% of sales from 20.2% of sales in the same period for the prior year.
In the Salt Life segment for the first nine months of fiscal 2022, growth margins grew 51.6% of sales from 47.9% in the prior year, driven by sales channel mix and high selling prices.
Selling, General and Administrative Expenses, as GNA, were $22.4 million in the third quarter of fiscal 2022, or 17.7% of sales compared to $19.9 million, or 16.8% of sales in the prior year's third quarter. The authorities were $22.4 million in the third quarter of fiscal 2021, and the third quarter of fiscal 2021, and the third quarter of fiscal 2021,
Selling expenses increase during the quarter, driven by sales channel mix in our active web business, combined with a rise in travel and trade show cost as compared to the same period last year. entity review in a minout of a year throughout the quarter, looking atone of the House's long-term strategic segment in June , 2020.
When travel was still depressed.
The addition of new Salt Life retail stores has also increased its GNA cost year over year. The new Salt Life retail store has also increased its GNA cost year over year.
Within our distribution centres, there is sustained pressure on wages where we are seeing a double-digit increase in the cost of our lives, social wages and incentive compensation.
The timing of issue and specific stock based compensation awards this year has also led to equity compensation expenses being elevated over the same period of last year.
Other income for the third quarter of 2022 was $1 million.
Business substantially made up of valuation changes in our contingent consideration liability of $0.8 million associated with the acquisition of data to go.
In addition, we also recognize profits related to our Green Valley Industrial Park equity method investment in other income.
Interest expense was $2 million in the third quarter of fiscal 2022, up from the prior year third quarter expense of $1.7 million due to high debt levels.
In June 2022, we completed the renewal of our 7th Amendment to our credit agreement with Wells Fargo, extending the term for 5 years to expire in June 2027.
The nine-month send is June 2022, our effective tax rate with 17.2% down from 23.1% in the third quarter of fiscal 2021.
We anticipate our tax rate for the full year to be approximately 18%.
Operating profit in the third quarter was $9.3 million, down from the prior year's third quarter, $11.9 million of operating profit.
We achieved net earnings for the June 2022 quarter of $6.2 million or 88 cents per diluted share as compared to $8.2 million or $1.14 per diluted share in the prior year.
At quarter end, the company's inventory was $227.7 million. $227.7 million.
Up 66 million dollars from September 2021 and 75.4 million dollars from the prior via June quarter end.
Our increased inventory level is a reflection of increasing input costs.
including raw materials.
Transportation Labor course Combined with an increase in units on-hand.
As a reminder, at this time in the third quarter of last year, we were continuing to build production.
and inventory levels were depressed.
At Salt Life, with the opening the Dishal Retail Door, combined with supply chain delays on source products, we planned for higher levels of inventory.
We continue to work across the Delta Group on aligning our manufacturing output to balance with demand and appropriately manage on-hand inventory.
TitleNet debt increased $40.7 million from September 2021 to $162.4 million at June 2022.
Cash on hand and availability under our US Revolving Credit Facility, total $30.8 million at June 2022, a $14.6 million decrease from September 2021. $14.6 million decrease from September 2021.
This decrease in availability is principally driven by capital expenditures, share repurchases and working capital needs.
As we continue to grow, we will prioritize investments to support our business strategy.
During the third quarter, we invested approximately $5.5 million in capital expenditure.
This capital spending has been mainly focused on digital print equipment to support our DTG to go business.
retail store opening and information technology initiatives.
We have largely completed our manufacturing expansion projects for our Delta group for fiscal 2022.
We plan to further invest in Salt Life retail location openings.
and complete focused manufacturing expansion projects.
during our fourth quarter, and anticipates spending approximately $20 million in capital for fiscal 2022. tomorrow,
In the third quarter of fiscal 2022, under the previously announced Share Repurchase Program, the company purchased 33,934 shares for one million dollars, bringing the total amount repurchased to $56.4 million over the night of the program.
At the end of the third quarter of fiscal 2022...
The company had $3.6 million of remaining repurchase capacity under its existing board authorisation.
I will now turn the call back over to Bob for final remarks.
Thanks, Simone. Delta Apparel's activewear and lifestyle brands, including Salt Life, SoFi, and Delta, continue to demonstrate broad-based market appeal. The combination of our broad customer base, diversified channels of distribution, and vertical manufacturing platform positions us to build additional revenue from unit growth and by providing expanded value-added services.
Continuing demand for our digital first, DTG2Go production model positions us well for growth and this exciting technology driven market.
Throughout the entire company, we have maintained our focus on the current economic environment and changing landscape and remain mindful of labor shortages, inflationary pressures, and supply chain disruptions.
Looking out into the last quarter of fiscal 2022, we are well placed for further top-line growth. In our last earnings call, we discussed our anticipated double-digit revenue growth for the full year. After our first nine months of fiscal 2022, we expect continued revenue growth during our fourth quarter into its seed our original goal of 10% revenue growth for the year.
And now operator, you can open up the call for questions. Thank you. We will now begin the question-amantium session. To ask the question, may this start in one on your touch tone soon. If you are using a speaker phone, please pick up your hands before they come to the case. Please pick up your hands before they come to the case.
If at any time your questions are in address and you would like to enjoy your questions, please press R and then two. At the front, you will talk momentarily to some love roster. At the front, you will talk momentarily to some love roster.
Our first question comes from Buenos Aires. until she goes to her head.
Hi.
Good afternoon, Bob and Simone. We'd love to touch upon the Delta Group and parse apart the Delta ActiveWare business and Delta Direct to better understand the demand for each category and what you're seeing happen on the expense side. In addition, pricing, how are you thinking about pricing go forward? You were able to mean to come in as expected on the gross margin side down 130 basis points. What do you see as the outlook going forward? Thank you.
Thank you, Dana, and good afternoon. Just before we turn over to questions, I'd just like to remind everyone that during the course of this conference call, projections or other forward looking statements may be made by Delta Apparel's executive.
Such projections and statements suggest prediction and involve risks 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 .
These documents 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 as accept 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.
I'll turn back to board to start your question, talking about where passing out Delta Direct and pricing. Thanks, Dana.
So Dana, I think, you know what we saw in our basic active-wear business is pretty much what the headline news was in the marketplace that the, in the mass channel, they fill over inventory or consumers are having to trade down to pay for food and fuel for their cars and what have you. So we did see some pullback there. Thank you.
Seems to be building a little bit stronger since then, but there was a four to six-week time. It's certainly not back to the levels it was earlier this year, but, you know, it appears to be kind of working its way through the system. So pricing has held steady. You know, we continue to have higher-price dyes and chemicals, cotton, you know, coming through our system, so we'll continue to look at, you know, our pricing in the marketplace.
if we don't get higher pricing in the marketplace, then we do have higher costs that will be rolling out who cost the sales over the next quarter or two.
Got it.
And then inventory levels.
Where are you on inventory levels for each of the divisions and how do you expect and the fourth quarter? How do you expect and the fourth quarter?
So in Salt Life, I'd say we're just where we want to be. You know, business has been growing nicely for us and we need enough inventory to service that well. And in our global brands business and retail direct business, our inventories are in good shape. And you know, that product is generally sold as we are making it and in fellowship. I mean, it's already sold. So when we have inventory, we've made it for a specific customer.
We've always had excellent success and customers fulfilling their commitments, and we wouldn't expect that to change in this situation. And so, in our business that we make product to an inventory level, as I said in my prepared remarks, we are reducing output of that, and we have reduced our normal consumption of cotton and plan to do that until...
mid-fall when lower price cotton will be in the marketplace and available to us and then we will really turn this picket back up on our manufacturing to have a little inventory position for our spring business. But don't do that with the Peat, Coll Houghton, which were the July contractor.
Thank you.
As a reminder, if you have a question, please star, then 1 to be joined into the queue.
Next, the next question comes from June Wally with Wally Management to her head.
Hi, fellas. On DTG2Go, you talked improving gross margins in subsequent quarters, but could you talk a little bit more about the top-line growth, the ability to pick up new customers, how is the relationship with Fanatic progressing, as well as adding combated machinery to your capacity now we're heading through Christmas season, as well as the labor availability to help fulfill the order.
So we now have all the equipment installed that will be installed for us to this calendar year. So that's running and then come in and what have you. So the last of that just came on stream in the last few months. I think we continue to add new customers particularly our directed folks that are looking for the digital first production which is south for the COVL feature.
then own brand directs who are taking more product to their sites, themselves of those pieces that are growing. And, you know, where this has started with the e-retellers, it's solved, but we have a good business there. So, but it's a technology, a new print quality, a new delivery, this allowing to drive unit and top line with the DTG to go. And, we think that...
in that business as we started up this production and we developed this equipment. I think we've got a lot. Most of that behind us now will still be building productivity gains and efficiencies as we run it longer. And because of the seasonality of the business now, we are ramping up now and we'll continue to be ramped through the holiday season. So I think one of the greats we have coming is.
you know, a strong six month business instead of a strong six business. And then we think that continue, you know, on sports calendar, you know, in the future, a lot of that fanatic business. So I believe good things to come. There will be staffing separately or differently in prior years, using some staffing techniques we've had in our, our, our, the faction plants in the pack that we think will allow us to ramp up more effectively and have a steady or worse.
Bob, that you're sold out in your digital business. You've been adding a lot of equipment. How are we sold out for the foreseeable future, given that you've been slowly adding equipment when we get it most?
Well, with that new admit coming on stream and growing production, my point and not taking additional tumors on that, we will have revenue increases certainly from where we were this quarter, past quarter, on into our fourth quarter and first of next year, point being all of our capacity is spoken for. Point being all of our capacity is spoken for.
Okay, and season allies in DTG to go the December should be the largest and which is the second best quarter is its September .
It's going to be December this year.
Okay on the salt life side
You have 20 stores now. What do you have planned for the remainder of this year? And look into 2023.
Yes, so we have one more that is likely to open. This fiscal year will be close, but likely to open. Then we've got one more that the lease is signed on for this year, that opened this quarter, first quarter. And we'll open four to six next fiscal year would be our expectation. We have a lot of area.
that we like to put stores in and it's a matter of finding the right location in a town locale that we know would be good and get the right location.
Are the existing stores maintaining the productivity that they have? Some of your existing stores had high volumes that seemed to have passed, but are they maintaining those volumes as they roll over from year to year?
They are and you know we've
I think it's pretty choppy economy there and what we saw maybe in the June time frame.
But not as strong as the prior. Last week was the best week in our history. Same or so, so stores that had opened the year and totality were made single digits. Made single digits.
We were 9% ahead of our Biz Plan for the week and I expect first month will have over $2 million of revenue through those 20 retail stores.
And year to date, so you've got about this with the seasonality, but year to date kind of gap operating profits, including these startup costs and what have you, has been the 12.5% range.
Wonderful. And on the e-commerce side, you have, that business is mislow as you have to supply your gale and wholesale costs first. But now that we have additional capacity, or quite understand, we're producing the holes, but do we have capacity in Tory for our life and our e-commerce business to start to get back on track and grow again?
Yes, and just in the last couple of months, gotten it back to its targeted level. We have a DC within our DC now dedicated to having products only for e-commerce that wholesale orders don't get and suck up our inventory. And we've seen a big improvement in our e-commerce sales in the last few days. Excellent. Thanks. I'll hop back into the queue to let someone else go. Now I even love the press revenue is incredibly important to us.
and it's our high margin piece of business in so life.
If you have no questions at this point, I would now like to turn the conference back with Bob Humphrey for any closing remarks.
Are you sure you have no questions in the queue?
No, I don't see anybody in the queue. Okay.
Well, thank you all in our call and look forward to updating you on the fourth quarter and full year results and the coming months. Thank you. Thank you. Thank you.
Thank you for attending today's presentation. You may now disconnect.