Delta Apparel, Inc. (DLA) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you and good afternoon to everyone participating in Delta Apparel's 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 of the Delta Group; and John Tester, Chief Accounting Officer. 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.
Bob Humphreys: Good afternoon. And thank you for joining us on our fiscal 2021 second quarter earnings call. We are excited about our performance this quarter. And I'm proud of our team's continued hard work to cultivate and service to 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 and turn the discussions over to Deb Merrill, who will go through our business highlights and to John Tester who will follow with a review of our financial results. I will then join them when we open the call up to questions there. Deb?
Deb Merrill: Thank you, Bob. We are indeed very proud of our second quarter performance as we continue to deliver results that outpaced our expectations. Our second quarter results reflect strong broad-based demand across our product lines, coupled with significant earnings expansion as we continued to drive efficiencies throughout our operating cost model. We achieved second quarter sales growth of 12% with double-digit growth in both our Delta Group and Salt Life Group segments. These were outstanding results as we capped off a stronger than expected first half performance, in which we delivered sales growth of 6% for the first six months of fiscal 2021, well ahead of our earlier expectations for sales contractions or at best, back to prior year. With regards to profitability, we delivered earnings of $0.62 per diluted share, well ahead of last year's reported EPS of $0.19 and adjusted EPS of $0.39. The strong second quarter performance is a true testament to our team's unwavering dedication to servicing our diverse sales channels, a reflection of our world-class manufacturing capabilities, and most importantly, the flexibility of our business models. As we look to the remainder of the year, I am confident in our ability to drive strong top and bottom-line growth.
John Tester: Thank you, Deb. For fiscal 2021 second quarter, we delivered sales of 108.6 million, a 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% and 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 in labor, freight, fuel and raw materials.
Deb Merrill: 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'll open the call for any questions.
Operator: We will now take our first question from Dana Telsey at Telsey Advisory Group, apologies. Please go ahead, sir.
Dana Telsey: Good afternoon. Congratulations on the nice progress in the quarter and especially relative to 2019 also. When you think about the growth initiatives that lie ahead, certainly one of the things that was new is the new partnership with Autoscale.ai. Can you tell us how some of these partnerships are going the Hot Topic partnership? How do you see that leading to higher sales and margin opportunities go forward? And then just a follow up.
Deb Merrill: Sure. Sure, Dana. And as we mentioned, our strategies around growing out the entire traditional kind of retail channel within DTG2Go are going extremely well. 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 Autoscale to combine their technology into our operations, I think will only enhance our ability to more quickly grow the traditional retail assets because what that provides us is an ability to offer our customers technology advancement, so that they can more quickly bring these listings to life. We've always talked about the endless supply of opportunities with a graphic library to offer those products across a vast number of garments and get those listings posted so consumers could buy them. And this technology will greatly basically automate that entire process to bring more listings to light, which then ultimately will drive more consumers buying them and drive growth in our digital footprint and fulfillment business. So we're most excited to be offering these front-end tools to our customers to enhance and accelerate the growth of on demand as the way to grow business.
Dana Telsey: Got it? And then if you think about commodity prices, cotton cost, what are you seeing out there in the environment, given we're hearing about inflations on raw materials and how do you expect inventories to progress going forward, given the healthy demand for your product? Thank you.
Deb Merrill: I sure I'll take that one as well, to start with certainly on cotton prices have been volatile in the last few months. Volatility in cotton is what we would all prefer there not to be that, but it has been out there. As we mentioned, we are seeing, having higher selling prices across our business that we think are going to offset those costs, or at least partially offset those costs and the other inflationary costs that we have seen. I think, as John had mentioned, and just trying to make sure everybody understands, those costs will start flowing through our P&L starting in the September quarter, which does add pressure compared to where we've been in margins in March and where we expect them to be in June. But we think the things that we have done across our business on both in our product mix and our other margin strategies should help offset those and allow us to continue to have the nice strong profitability that we've had in the business. One thing with that is our inventory cost per unit, as we build back, this inventory will be a bit higher on a per unit basis but then we also expect to then be able to build back the units in inventory that we need to support the business as we go forward. We said that we expect to be a bit inventory constrained in the next coming quarters. That should again start easing as each quarter goes by with the anticipation that we will have the inventories to support growth that we expect in the business as we get to the spring selling season a year from now.
Dana Telsey: Thank you very much.
Operator: Thank you, we will now take our next question from Jamie Wilen at Wilen Management. Please go ahead. You line is open.
Jamie Wilen: Hi, everyone. A nice quarter. Sticking with inventory for a second, you anticipated there would be about a $20 million sales impact in the March quarter due to the light inventory. How will you ever overcome all that?
Deb Merrill: Jamie, good call out on that because this is now basically the second quarter in a row that we've overcome that headwind. And I think a lot of that comes from the efficiencies we found in the business on our manufacturing team that is even more laser focused on manufacturing the items that we need to support the business. All that being said, and while we're most pleased with the growth that we did achieve in the March quarter, I think you would have seen even stronger growth had we had more inventories to support that. So I think it's a combination of both of those. And 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 few quarters.
Jamie Wilen: Okay. As you said your cost per unit in the inventory is higher, your inventory is significantly lower. In terms of units, how much lower is your unit - is your inventory level? And as well as, where would you like the inventory level to be right now?
Deb Merrill: Yeah, I would say, as we speak right now, our inventory costs have not increased that much. They will start increasing as we're bringing in the higher raw materials into the production standpoint on kind of as we speak right now. I would say our inventory levels, the units that we do need more units on, but the good news is that we have determined we don't need as much as we had. So I would expect that when we get back to the levels we need, we will still be lower in both our inventory units and our inventory dollars than we were running pre-pandemic levels. So 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 less inventory than we were running pre-pandemic.
Jamie Wilen: On the DTG2Go side, you mentioned Hot Topics growing nicely. Obviously, this must be incremental profits for the retailer. They're pleased with their progress?
Deb Merrill: Absolutely, they are, continue to implement new initiatives and new things to continue to expand that. But I think it has far exceeded their expectations and ours from when we started doing business back with them. And I think there's more great stuff to come from that partnership and relationship. I think there's a lot of other retailers out there that are realizing the benefits from it as well. And, as we mentioned, our overall traditional retail business has grown nicely that comes from additional partnerships and additional platforms that are picking up these on demand listings. And so we believe, as we said, before, that this really revolutionizes how that can be. As you said, it's kind of free growth for all of them. And I think that channel is the one that just has tremendous opportunities to push more through in on-demand model.
Jamie Wilen: When you talk about gaining new partners in that channel, are you talking about similar situations to where you'd be in house with a retailer?
Deb Merrill: I think, ultimately, yes. As a reminder, we started doing business with Hot Topic a couple years prior to actually putting the facility in theirs. And so I think you're just seeing that same thing happened, where people get onboard, understand it, grow their business, get excited, see the potential of it. And then we just want them to know we're there for them when they're ready to put it and get the secondary benefit of having it right there, integrated within their own distribution center. So it's really a service model to quickly begin with them using our network of facilities, and then ultimately give them the additional benefits that come having their own operations in their distribution center.
Jamie Wilen: Gotcha. And lastly, Deb, on Soffe, obviously, you've changed the cost structure there. So you'll have better operating margins in that business, but the ability to drive increasing sales, it's what is what's going to be the catalyst moving forward. Does the new structure help you do that? Have you seen any difference in what Soffe's top line is looking like or will look like?
Deb Merrill: Yes, those are great questions. What we are doing is, again, not only setting it up from a cost standpoint, but also much more efficient to operate and service our customers. And certainly that in and of itself can drive additional revenue. We've spent for basically the last year to 15 months integrating and working through our sales force channels and structure within our sales organization, along with our marketing and merchandising and e-commerce organizations. And so we think now with those already set, and then the operational improvements in place that we are ramping up right now in systems that we have that 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 opportunities, having the eyes on the Soffe brand, and be able to now start building back the revenue in that.
Jamie Wilen: Excellent. That was a heck of a quarter. Thanks, fellas.
Deb Merrill: Thank you.
Operator: Okay, so it looks like that is all the questions we have for now. I would now like to turn the call back over to the speakers for any additional closing remarks.
Bob Humphreys: Well, thank you all for joining us today and we'll look forward to a new call in about three months to update you on our third quarter results. Thank you very much.
Deb Merrill: Thank you.
John Tester: Thank you.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
