Delta Apparel, Inc. (DLA) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. Thank you and good afternoon to everyone participating in Delta Apparel's Fiscal 2021 First Quarter Earnings Conference Call. Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer; and Deb Merrill, Chief Financial Officer and President of the 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's executives. Such projections and statements suggest prediction and involve risks and uncertainty, and actual results may differ materially. Please refer to the periodic statements filed with the Securities and Exchange Commission, including the Company's most recent Form 10-K. This document identifies important factors that could cause actual results to differ materially from these contained 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.
Bob Humphreys: Good afternoon, and thank you for joining us on our fiscal 2021 first quarter earnings call. I'll start the call with a brief summary of our first quarter performance, and then turn it over to our CFO, Deb Merrill, for additional business highlights and financial results. We are off to a great start in the fiscal year, with first quarter sales well ahead of our internal expectations for both sales and profitability. Through a combination of strong order demand and outstanding manufacturing and operational execution at all levels, our December 2020 quarter sales were nearly flat with the prior year levels. We achieved these results despite notable headwinds from inventory constraints, hurricane-related disruptions in Central America and freight carrier limitations during the holiday season. Our profitability also significantly expanded this quarter with improved gross margins and operating profits in both our business segments. Adjusting for the hurricane disruptions, our operating income increased over 65% to $4.4 million for the December quarter, and our earnings more than doubled to $0.28 per diluted share. We were particularly pleased with the accelerating success of our own demand retail model within DTG2Go as we gain significant traction to traditional retailers expanding their business utilizing digital print. Unit sales in this new retail channel of the DTG2Go were four times the level they were a year ago, further diversifying the base of customers seeing the benefit of our unique, vertically integrated on-demand supply chain. We also capitalized on market opportunities that fuel growth and expanded profitability in our Activewear business, overcoming the challenges caused by inventory constraints and continued disruption in certain channels of distribution as a result of the ongoing COVID-19 pandemic. Within our Salt Life Group segment, our strong results and improved margins were driven from direct-to-consumer sales with robust store performance on a same-store sales basis as well as our recently opened retail doors across Florida. At the same time, Salt Life continued to service and performed well for our independent and regional wholesale customers despite the disruptions they've been experiencing during the pandemic. We go into the spring shipping season with the strongest wholesale order backlog in Salt Life's history.
Deb Merrill: Thank you, Bob. Looking first at our DTG2Go business, it clearly remains a market leader in the on-demand direct-to-garment digital print and fulfillment industry. Coming off of a very strong back half of fiscal 2020, our overall unit sales during the first quarter were down about 7% despite being up double digits during the holiday season. While not what we initially expected, there were some notable achievements in key takeaways that are important to understand. It appears across the board that overall consumer spending pull back in September, which continued into October and November as consumers grappled with the rise of COVID infections, the election and uncertainty regarding the additional stimulus package. Many of our customers saw their sales faltering 20% to 30% compared to the prior year during these months. This news picked up significantly with our customers as Thanksgiving approached, driving a strong start to the holiday season at DTG2Go. We're proud of our employees at our nine print facilities across the U.S. where we operated our facilities 24/7 fulfilling orders at a record pace. As you probably saw in the news, with one-third of online shopping, major freight carriers imposed shipping limitations and moved guaranteed holiday delivery cut off earlier, thereby hampering the holiday season potential. Despite these headwinds, DTG2Go saw double-digit growth in units shipped during the holiday. This strength was not enough to overcome the start to the quarter, resulting in first quarter units being down to the prior year. We saw remarkable strength in the retail channel with our new on-demand DC service model, which provides retailers immediate access to utilize DTG2Go's broad network of print and fulfillment facilities while offering the scalability to integrate digital fulfillment within the retailer's own distribution facility. With the launch of DTG2Go's first on-demand DC, our partner was able to more than double their on-demand business during the December quarter from a year ago, providing a better consumer experience while also benefiting from reduced shipping costs. We believe our on-demand DC solution is a compelling value proposition to brick-and-mortar retailers and brands alike, offering their consumers limitless merchandise selection, personalization options and seamless fulfillment across a broader supply chain with no excess inventory risk. This channel of distribution offers significant future growth to DTG2Go with the significant size of this market, combined with the giant leap forward in service, speed and economic benefits offered to the supply chain.
Bob Humphreys: Thanks, Deb. To summarize, our business is performing very well as we continue to ramp-up to record levels of production to keep up with the strong demand that we have in our pipeline and the future opportunities we see on the horizon. Our first quarter results, accelerating momentum and current balance sheet, which is stronger than ever, have positioned us well to deliver against our goals for the fiscal year. Our results continue to demonstrate the strength of our fully integrated and diversified business model, the power of our Salt Life, authentic lifestyle brands and our unique manufacturing capabilities. Our sales, marketing and operational teams have done an outstanding job of pivoting our business to channels of distribution, less affected from the pandemic while continuing to build a foundation to take advantage of future growth opportunities as disruptive panels rebuild to a more normal level of business. Once again, Delta Apparel's broad channels of distribution have served us well as historical business norms have been challenged. As disruptive as the pandemic was, we delivered on our promise of emerging as a stronger company, well positioned for many years of profitable growth. Thank you. We appreciate your continued interest in and support of Delta Apparel. Operator, we'll now open up the call for questions.
Operator: All right, first from Telsey Advisory Group, we have Dana Telsey. Please go ahead.
Dana Telsey: Good afternoon everyone, and nice to see the progress that you're making on pivoting the business during this time. As you think about supply chain and the inventory levels, given what's happened out there and the constraints, can you just frame it, how do you think of inventory getting to where you need by when should that be? And how do you think of margins until we get to that time period? Thank you.
Bob Humphreys: Well, I think we will be inventory-constrained for the next nine months or so, best case with just normal market conditions. Our whole industry ships more in the spring and summer than it can produce, and so we normally pull down inventories and then rebuild them in the fall. So, we will be operating, we believe that full steam, but probably not catching up until really next fall. So, I think there's going to be market constraints. There's -- outside of just what we produce in Central America and in this country, there's constraints of shipping from China and other parts of Asia. So for our type of apparel, I do believe we'll be relatively tight on inventory for a while. But we learned from that, and as Deb was saying earlier, learn how to turn our inventories more and service our customers with less inventory.
Dana Telsey: And then, any -- how is the hot topic program going and new customers for that business model?
Deb Merrill: Well, Dana, as we mentioned on, we were able to, through that customer and other customers, other retailers that are currently using our existing platform, don't have their own on-demand DCs but utilizing our digital network that we have. We saw great success, as Bob mentioned. The units in that type of sales channel were four times as high as they were a year ago. And so again, we think that, that means that things are pivoting in that direction, that they're seeing the benefit of this on-demand supply chain that are out there and really have only begun on that path. We believe the future, this is just the beginning of it, and it will continue to expand as more and more retailers get on board and more products get out there for delivery.
Operator: And then moving on from DV Advisors, it looks like next question will come from Bill Fogel.
Bill Fogel: Can you hear me?
Bob Humphreys: Yes.
Deb Merrill: Yes, we can.
Bill Fogel: Okay, great. Congratulations on a great quarter. It seems like you guys are firing on all cylinders, and the only issue is really product out there. So just to give me a feel for how strong the demand is, if you didn't have inventory constraints, how much supply do you think the market in terms of growth in your revenues is currently out? Like how much are you under-serving the market versus where it would be once you get up to full speed in terms of inventory replenishment?
Bob Humphreys: Well, it's always hard to judge that precisely, but my estimation is that we would be up high single digits, particularly in our basic Activewear business. And I think the important thing to realize about that, there's still several channels of distribution that we'd only participate in that are well off their prior pandemic levels, anywhere from 40% to 70%. So our hats really off to our sales and marketing people and partner with our manufacturing people to not let that end in the feet and really go after these new channels of distribution that require different service levels and different ways of doing business and doing that quickly. So our belief is that we'll keep big pieces of that business, but we are still expecting some traditional channels that are well below their prior year levels to rebound as business gets back to a more normal pace in this country.
Bill Fogel: Okay. And then also, is Delta -- how is demand currently for the DTG2Go product? You had stated that you were negotiated with negotiation with several large companies that have like a similar deal to the top topic. How are those negotiations going? Or should we just assume that you're getting deals and you're not going to announce somewhat on how you're going to communicate going to communicate that?
Bob Humphreys: Deb, you asking to that?
Deb Merrill: Yes, absolutely. So as I mentioned on, we are currently working with other retailers out there in the market. They're currently participating, utilizing our fulfillment network. And I think one thing people have to keep in mind is that the on-demand has that as an offering that we are and would be willing to put things in their own distribution centers. But as you can imagine, with a network of nine fulfillment facilities strategically located across the country, there's a lot of benefits of just simply using the network that we have, and we're certainly good with that as well. So, I think announcements can come in the future, but as well as you can imagine, there's confidentiality with certain ones as well. So, we have to respect that. The good news is, is that it is an array. It is multiple different retailers that we are servicing right now. And I think that, that broad base will continue to get stronger as we go through the upcoming quarters.
Bill Fogel: And the final question before I jump back in the queue, if that's okay, is, what kind of growth are we hoping for that you could fulfill in the back half of -- in the back half of the year, firstly? And then secondly, in a recent conference, you had noted in the near term, you have $56 million in EBITDA potential as the combined business. And by near term, what did you mean by that? Is that 6 to 12 months, 12 to 18 months? Thank you.
Deb Merrill: So I'll jump in. Yes, I'll be dealing with a little bit on that. And do keep in mind, I mean, it is, we talk about growth in the back half, when we get to the June quarter, certainly, that was the hardest hit quarter because of the pandemic and then as you roll through the fourth quarter, the fourth quarter, we were able to have sales growth in that fourth quarter of last year. Some of that, of course, was the pent-up of not selling during the June quarter. So, there will -- it's certainly forecasted to be growth compared to the 2020 year, but we'll get a little -- kind of a little corked quarter-to-quarter there in taking a look at that. So, we think both of those quarters will be there historically strong quarters of the full fiscal year. When we presented at the conference and for those of you that were on not, that is on our website as well that you can take a look at that. But that near-term in that presentation is really kind of focused in that kind of two- to three-year mark would be probably the time line. Different pieces of it come in at different times, anywhere 18, 24, 36 months is the time frame that we would be looking for that near-term goal.
Operator: Looks like the next question will come from Wilen Management, we have Jamie Wilen.
Jamie Wilen: Nice quarter in the face of all those headwinds, a couple of questions on DTG2Go and the business model. When you talk about working with hot topic and looking at it from their perspective, they double their value, but you also mentioned they lowered their shipping costs, even though you were handling all that for them. How much does that impact? In addition to increased volume, how much does the lower cost impact for hot topic?
Deb Merrill: In overall, I can't answer that. But when you think about every package, you ship a package with a shirt in it, I mean, you're probably on average stocking about a $5 package. So the fact that now those packages instead of having an incremental $5 for every package you ship out now it's going in the same packages or other, that can add up quite significantly over the course of a year to them. And so, I think that's a big dollar benefit. Again, coupled with a better consumer experience to receive your package that you order online altogether in one bag as opposed to them coming at different times, it's just a better overall consumer experience. And so, I think they're very, very pleased with the path we're on. And I think it's just beginning we just launched that right before holiday, and so lots more to come on that. And ultimately, I think, with other retailers.
Jamie Wilen: Outstanding. You talked about the growth of DTG2Go, both domestically and abroad. I think you mentioned China that in Europe, moving international, would that be in fully integrated warehouse facilities? How -- and when you look out two to three years, how many fully integrated facilities would you see domestically, internationally? What's your broad scope of where you can be in a few years?
Deb Merrill: Well, I think there's a lot of -- when you're talking about international, there's a lot of potential opportunities for us to bring both our Delta Catalog goods over internationally, along with our DTG2Go fulfillment, digital print and fulfillment facility. So more to come on what that strategy will be, but I think there's opportunities across the board to go internationally with a full integrated solution, so some exciting things that can happen there. And ultimately, I would think, in the U.S., the good news is, is that we have expansion capabilities within the nine facilities that we're currently operating in. But ultimately, I would see that we would have digital print in every distribution center that we have in the U.S. So that everyone was fully integrated to ultimately do the digital print on the Delta garments.
Jamie Wilen: Okay. And then overseas is the drill printing industry as well in trend? To what stage is it versus where we are in the states?
Deb Merrill: Yes, I would say it is not as far as advanced as it is in the United States, but their growth rates are higher. And so, I think it's certainly coming, I think there's big opportunities for it, which is why, again, we're going to take advantage of that in due course. So, I think that certainly would have been earlier had it not been for the pandemic, and that slowed some things down. But I think here in short order, you'll see us moving in those directions.
Jamie Wilen: Excellent. And lastly, on the cost side. You reduced your SG&A by incredibly significant percentage. Will you be able to maintain some of that? Or is that just one-time credit reduction cost that will start to creep up ahead of the year ahead of last year as the sales volume increases?
Deb Merrill: Yes. I would say, certainly, as we mentioned, some of those costs are differences in the business. I think some are here to stay, and we'll be able to keep them. As I mentioned, we figured out ways to run our business even more efficiently than we were, moving a lot of our marketing and sales strategies more digitally, and we already were doing a lot digitally, but the continued migration of that and I think a lot of that is here to stay. Now, is there some incremental costs that ultimately will come back into the business? Yes, I think there are as some of the more traditional things just in the industry come back and more of the country opens back up and different things like that. But I do believe that overall, we have figured out a way to operate our business and continue to grow with overall lower SG&A costs.
Jamie Wilen: Great job, excited times ahead.
Deb Merrill: Thank you.
Operator: Sir, it doesn't look like we have anything further from the audience at this point.
Bob Humphreys: Okay. Well, thank you all for joining us today, and we look forward to updating you on our second quarter results here in just a few months. Have a good day.
Operator: All right. Once again, ladies and gentlemen, that does conclude our call for today. We do appreciate you joining us. You may now disconnect.
