Delta Apparel, Inc.
Q1 2017 Earnings Call Transcript

Published: 6 Feb 2017

[Operator:]

Thank you and good afternoon to everyone participating in Delta Apparel’s Fiscal 2017 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 Delta Basics. 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 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. This document contains and identifies 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 Company does not commit to update or revise these statements even if it becomes apparent that any projected results will not be realized. I'll now turn the call over to Delta's Chief Financial Officer, Deb Merrill for an overview of Delta Apparel’s results.

[Deb Merrill:]

Good afternoon. For our first quarter of fiscal 2017, we had net sales of 85.3 million, this was down 4.8 million or 5.4% from the 90.2 million reported for the 2016 first quarter. While net sales for the quarter were negatively affected by a number of factors that Bob will discuss in more detail, overall gross margins remained solid at 20.6% about on par with the prior year quarter. The company had a net loss of 607,000 or $0.08 per diluted share in the 2017 first quarter compared with net income in the prior year quarter of 681,000 or $0.09 per diluted share. Net sales for the branded segment were down by 4.2 million due to the struggling retail environment that negatively impacted the traditional brick and motor customers of Soffe and Junkfood. This includes the closer of The Sport Authority and similar challenges with other specialty retails. In addition Salt Life experienced a slow start to the quarter due to Hurricane Matthew in the unseasonably warm winter weather, but we were still able to grow nearly 4% during the quarter, reaching record first quarter revenue. Despite the lower sales, margins for the branded segment expanded 160 basis points compared to last year's first quarter. In the basic segment there was a 1.1% decline in net sales due entirely this lower business with Activewear retail license account, as mass channel retailers destocked inventory. This was partially offset by sales growth in its other sales channel and strong sale of Art Gun, where sales exceeded 5 million for the quarter, an all-time record. Gross margins declined slightly in the basic segment but are expected to increase significantly as the year progresses with the benefits of lower product cost from the manufacturing realignment and continued process improvements in operations. Total capital spending for the quarter was 1.7 million, this was principally related to our direct-to-consumer initiative including ecommerce upgrade and our retail store build out. In addition, we invested in expanding printing capacity and in our distribution facility. We anticipate capital spending for the full 2017 fiscal year to be somewhat lower than that of 2016 and will come in around 10 million. Depreciation and amortization including non-cash compensation was 3.1 million for the first quarter. During the 2017 first quarter we repurchased 46,643 shares in Delta Apparel stocks at an average cost of $17.60 per share for a total cost of 0.8 million [ph]. At the end of the first quarter we had 8.3 million remaining of our board authorization for share repurchases. We continue to believe that the intrinsic value to company is significantly higher than its current share price range. While the first quarter's top and bottom line comparisons are not indicative of the growth we expect to see, there're many other factors signaling to us that growth will return as we progress through the year. Many other transient conditions that hampered our first quarter results have passed. We're introducing exciting new products, our inventory levels correspond to our growth objective, our ecommerce businesses and sites continue to prosper and margins are solid and expanding. I believe we have good reason to feel optimistic about the year ahead. Now I'll turn the call over to Bob to give you more insight into our business unit.

[Bob Humphreys:]

Good afternoon, thank you all for you interest in Delta Apparel and thank you for joining us on the call this afternoon. As you saw from the earnings release that we issued sales in the fiscal 2017 first quarter were up a little more than 5% from the prior year's first quarter and our results continue to be on track with our expectations. While we have made Delta Apparel more agile and less vulnerable to this difficult retail environment, our sales in the first quarter were negatively impacted by circumstances that were out of our control. Hurricane Matthew spoiled retail spending in the affected states and while spending did return to normal the shortfall was last for the season, especially as resort areas were dealing with the effects of the damage, and unseasonably warm weather also hindered sales of our long sleeve tee and other cooler weather products. These should not however have a lasting effect on the growth of Delta Apparel and we anticipate growth through the back half of the fiscal year. In the meantime we're focusing on those activities that will have a positive impact on our top and bottom lines and on our continuing efforts to improve efficiency and service for our customers while expanding our gross margins. The positive results of these efforts can be seen in our first quarter and should become more apparent throughout the rest of the fiscal year. We added more equipment and made improvements to the production flow at Art Gun which gives us the capability to print more than 15,000 unique garments per day and ship them to customers across the world. We handle that level of volume and scope during the holiday season without a snag to the complete satisfaction of our customers. Our excellent performance during that time has attracted additional customers who should support Art Gun's continued growth during the upcoming quarters. For a better understanding of Art Gun's new capabilities, consider that we can print and ship more than 5 million unique garments per year on over 6,000 different garment SKUs. When the order is placed on a e-retailer site, it can be produced and shipped to the customer that same day or the next day. This virtual inventory model is the wave of the future for many of today's traditional retailers and Art Gun is uniquely positioned to seize this opportunity. Our belief is certainly bolstered by Art Gun's first quarter performance, featuring record revenue and sales up 28% on 34% higher unit volume. Gross margins expanded 650 basis points yielding record double-digit operating profit and we believe Art Gun is poised for another year of record revenue and profitability in 2017. We're also seeing strong results and future growth opportunities with Salt Life. It's new Fayetteville, North Carolina distribution center is already lowering costs and improving service to customers, and it is one of the drivers of Salt Life's improved profitability over last year's first quarter. While sales growth was hampered by Hurricane Matthew and unseasonably warm weather, Salt Life still had record first quarter profits on 3.8% sales growth. Performance in junior's products continued solid growth and saltlife.com had record sales, up nearly 50%. Significantly, during the first quarter we had e-commerce sales of Salt Life products in all 50 states as our geographic reach continues to build. We also had sales on all 52 styles of Salt Life decals selling nearly 5,000 Salt Life decals on the Web site alone. Which our customer surveys indicate is the number one way consumers learn about Salt Life. Salt Life is continuing its consumer outreach in California and will soon open its Huntington Beach store. We are excited about the opportunity for this location, as well as San Clemente as we approach the spring and summer season. Salt Life ended the quarter with a strong order position that we believe points to double-digit sales growth in 2017 with improved profitability. We are applying the experience gained through the development of Art Gun and Salt Life to Coast Apparel, the young direct-to-consumer business that we required in August. Although still small, it is doing as we had expected with the growing ecommerce business, which is benefiting from Delta Apparel’s digital marketing expertise and financial backing. Coast Apparel will open in flagship store in Greenville, South Carolina this quarter. And we look forward to solid direct-to-consumer growth along with new opportunities to expand Coast wholesale distribution. Soffe which was hindered by the closing of The Sports Authority and a large winter product return had strong ecommerce growth with B2C sales, up 30% and B2B sales up 40%. Soffe continues to expand its customer base and growth with existing customers. Soffe has a unique U.S. made product offering with deep roots in the military channel. The combination of the Soffe brand, domestic manufacturing and military heritage gives us a significant advantage in this growing market and should be a source of future growth for Soffe. Along with building sales volume, we expect to lower inventories and reduce costs to improved profitability. Junkfood, without the benefit of sales momentum generated in the prior year first quarter from a large-scale movie rollout is also hampered by sales decline at traditional brick and mortar retailers particularly in the specialty sales channel. Delta Activewear saw sales growth in many of its sales channels. However, this was not enough to fully offset the decline with retail license accounts resulting for mass channel retailers de-stocking inventory. We saw a strong growth in our other sales channels including ad-specialty and regional screen-printers. Catalog’s higher margin fashion basics continue their strong growth trend with sales up more than 50% over the prior year quarter. We expect our new fashion basics introductions coming online as we speak including Delta drive female silhouette [ph] and our Delta Platinum line of tri brands [ph] will continue to expand fashion basics sales throughout fiscal 2017. We saw positive results and our manufacturing platform during the quarter where we meet out production and cost reduction goals set in connection with our recently completed manufacturing realignment. These benefits could be seen in lower cost of sales beginning late in the 2017 March quarter and should be fully realized in the second half of the fiscal year. While, we anticipate a continuation of the current challenging retail environment. We believe fiscal 2017 will be a year of growth and improved profitability for Delta Apparel. We have entered the year with exciting new products. We have lowered our manufacturing and distribution cost and we are adopting innovative ways to service our customers. We believe that Art Gun and our various ecommerce sites represent the wave of the future and we are developing synergies with them that will benefit all of our business units. We are nurturing our brands and expect to see continued strong growth from Salt Life. We believe the initiatives that we completed in fiscal 2015 and 2016 across all of our business units along with a leveraging a fix cost across higher volumes should expand gross margins and operating profit, building further value for our shareholders. Operator, we will now be happy to answer any questions callers may have.

[Operator:]

[Operator Instruction] And we do have our first question from Dave King with Roth Capital Partners.

[Nick Meyers:]

Hi guys, this is actually Nick Meyers on for Dave King. How are you doing?

[Deb Merrill:]

Good thanks.

[Bob Humphreys:]

How you are doing Nick?

[Nick Meyers:]

Doing very well, thank you. Regarding Salt Life, there are several things that had an outside negative impact, but can you -- you guys said you guys expect to return to double digits, correct?

[Bob Humphreys:]

That’s correct.

[Nick Meyers:]

Okay, just making sure. And then on -- about Salt Life too in San Clemente, any further learnings there at that store and any differences in customer preferences versus other market?

[Bob Humphreys:]

Yes, I mean definitely a different look on the West Coast, different type of graphics, different colors that people are used to. But we are seeing good sale of our more baseline products I'll call it. Obviously, there is different spices of fish and wild life that are prevalent on the West Coast that aren’t on the East Coast, so we make adjustments from that and have new product coming in for the store. And we'll monitor what sells and what doesn’t sell and adjust that offering accordingly.

[Nick Meyers:]

Perfect, appreciate the color. And then also can you provide a bit more colors surrounding the weakness at retail licensing accounts? And how long do you expect the weakness to continue?

[Bob Humphreys:]

Well, I would say mass retailers are changing their flow set and changing their amount of products on the floor. Actually, I think graphic Tees are a little bit late to the party, are some of those changes, you've heard about the same story in different product categories over probably the last four or six quarters. And generally, it's seems like it's slow to come back. And I think the key will be, can the same amount of product be sold with less product on the floor. And if so then you have a destocking effect and then the velocity is the same but obviously if there is less product sold because less has been displayed in that changes, the game of its. So I think too soon to tell on how that will affect in graphic t-shirt business, but I think it is a robust item for the mass market that they will work harder to keep at least the same amount of revenue, overtime.

[Nick Meyers:]

Okay, appreciate that sir. And then last one and I'll step back. What are your current thoughts on leverage, I think it's still about -- it's still over four times trailing 12 months EBITDA. We realize it's actually a very low cost, but is there an optimal level you guys have?

[Bob Humphreys:]

Well, I don’t know that there is an optimal level because all of the circumstances surrounding change overtime, I think in our case not only is it low cost, but it's asset based so there is not covenants associated with it to trip you up and that sort of thing. But generally we think our job is to make money for our shareholders and take measured risk and obviously if we can bury 25% to 40% of our capital at 4% or less and then earn something north of 10%, it helps us leverage that for our shareholders and we pretty much follow that path for the 16 years we've been public now, striking out on new initiatives or acquisitions and we take on debt, and then subsequently pay it back down until we have liquidity to take the next step. So, we'll continue on that path as long as the credit environment is like it is now. But during this fiscal year if nothing else changes we would expect to pay down debt and lower that leverage ratio.

[Operator:]

Our next question comes from Joe First [ph] with First Associates.

[Unidentified Analyst:]

I just had a question about the asset value, first of all I want to commend you for buying back [indiscernible] stocks as it's under book value, the book value is little over 20. But my question is this, the Salt Life brand itself, how much of that is in the book value and what do you think the real value of that business is?

[Bob Humphreys:]

Well, Deb could answer a little bit more about what it's on the books, but if you look at what growing lifestyle brands have been, selling for and there's been a number of exchanged hands over the next couple of years; I think they were in the 12 to 15 times EBITDA in today's world; over 2 times revenue.

[Operator:]

[Operator Instructions] And our next question comes from Jamie Wilen with Wilen Management.

[Jamie Wilen:]

Just want to follow-up on the previous question, what is it on the books for now, you gave the metrics for what it could be worst, but what is it on the books for today?

[Deb Merrill:]

The brand on that is on the book for a little bit less than $40 million.

[Jamie Wilen:]

When I look at the balance sheet inventory is up significantly, is that part of the game plan or just a seasonality aspect or the price of cotton rising a little bit, but what's the strategic plan with inventory and how does that affect how you're going -- to the earnings looking down the pipe?

[Bob Humphreys:]

Well I think it's a little bit of a combination of all of that, cotton price in our inventory and going forward it's higher than it was a year ago, so that is a piece of it. You may recall last year at this time we were under inventory particularly in Activewear and running out of product in the strong spring selling season. So we have purposefully built up our Activewear inventory to some degree and then we brought in our Salt Life particularly fashion product that we sourced about four or five weeks earlier this year than we had in previous years and it's paying off with early shipments in this quarter. But to have that product on hand to ship earlier to customers. So, all in all we feel good about where we are on inventory, we've some aggressive plans to lower inventory as the year goes on and we're always trying to make it a better inventory but where we're today is pretty much where we had planned.

[Jamie Wilen:]

And you mentioned how the cost savings will come in in the third and fourth quarters pretty much totally, are you still on track for when you did the consolidations and equipment purchases to gain cost savings of the, I guess it was $7 million $8 million on an annual run rate?

[Bob Humphreys:]

Yes. At least $8 million and we’ll get about four or five weeks of that in the March quarter that we’re in now. So we’ll start seeing it and then a full quarters worth by the June quarter.

[Jamie Wilen:]

Okay. And are there other things you put into promotion, you’re always seem to be doing cost savings that will come into play a year or two down the pipe. Are there other things in the wings as well?

[Bob Humphreys:]

We’re constantly scratching our head and working on things. I think we got a few more things to leverage our platform that we are working on and maybe you can have more color on that by the time, we get to March.

[Jamie Wilen:]

Okay. What percentage of your sales now go through brick and mortar stores versus direct whether, it’s your Web sites Art Gun, what you sell-through Amazon. What percentage of your sales do not go through brick and mortar stores today?

[Bob Humphreys:]

It’s a significant and we actually had that question come to us a few days ago when we were down a little bit a math on that. It's somewhere in the -- and we will, maybe that will be our tit-bit of information for next quarter’s call. But somewhere in the 60% or 65% of our revenue does not go through traditional brick and mortar.

[Jamie Wilen:]

Okay. And lastly on the Salt Life program, anything you’re doing unique this year? Marketing wise and geographically any territories you’re targeting for and any national retailers that have coming into the fold or are you going to keep it more in the specialty vein move forward?

[Bob Humphreys:]

Yes. I think there is the couple of national or just about national retailers [indiscernible] who has a pretty national footprint. There is one or two others that might be appropriate for Salt Life that we have done some business in just particularly areas previously like stickers. Right now, if you look at what’s going on with the national retailers that are going through transition and you compare that with our ability to grow our ecommerce sale and already being in 50 states with ecommerce combined with some branding stores located in places where we want to build. I think that’s a good path for us as long as we can maintain good growth and that we’re positioning the brand for the future.

[Operator:]

[Operator Instructions]. It looks like we have no further questions. We’ll turn the call back over to our speakers for any closing comments.

[Bob Humphreys:]

Okay. Well, thank you all for being with us this afternoon. And we look forward to talking to you about March here in the not too distant future. Thank you.

[Operator:]

Once again that does conclude today’s call. We appreciate your participation.