Delta Apparel, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Aug 2015

[Operator:]

Thank you, and good afternoon to everyone participating in Delta Apparel's Fiscal 2015 Third Quarter Earnings Conference Call. Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer; and Deb Merrill, Vice President and Chief Financial Officer. Before we begin, I would 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 or that any contemplated actions or initiatives will not be implemented. I'll now turn the call over to Delta's CFO, Deb Merrill, who will provide the results of the company's fiscal 2015 third quarter June 27, 2015.

[Deb Merrill:]

Thank you and thank you all who are joining us on the call. I'm happy to report that Delta Apparel had a good June quarter. Net income doubled 4.4 million or $0.55 per diluted share compared to the prior year third quarter of 2.2 million or $0.27 per diluted share. Operating profits for the 2015 third quarter was 5.7% of sales or 5.3 million improvement over the comparable 2014 period. While sales after adjusting for the 5 million revenue reduction due to the second quarter sale of the Game grew a modest 1.7% based on current retail conditions, overall we’re satisfied with this improving trend for our company. Our gross margins continued to strengthen with the 260 basis point sequential improvement from the March quarter a 270 basis point improvement year-over-year. But for the first nine months the fiscal 2015 net sales were 328.9 million compared with 338 million in the prior year period. The sale of the Game collective [ph] business in March contributed 6.4 million to the decline. Net income for the 2015 first nine months was 3.9 million or $0.48 per diluted share compared with the net loss of a 195,000 or $0.02 per diluted share in the 2014 period. Our basic segment had net sales of 79 million in the 2015 third quarter of 4.2% increase over the 75.8 million in the prior year's third quarter with both activewear and Art Gun contributing to this increase. Activewear sales increased 3.6% year-over-year, this was driven by a 12.7% growth in the sale of private label products. We continue to grow our catalog full package programs where we’re providing our customers with value added services including declaration and retail packaging on catalog [indiscernible]. We have also had success in new product categories including fleece and our Delta Dri performance products. In the June quarter we saw 26% growth in our fleece sales compared to the prior year quarter and a 43% growth in our performance product sales. Art Gun our smallest but fastest growing business increased sales 26.2% to 2.9 million on a 41.2% increase in units. The basic segment overall achieved solid margin expansion both sequentially from the March quarter and year-over-year due to a stronger product mix, greater efficiencies and manufacturing an operation and the benefit of balance selling prices with lower cotton cost. Our branded segment had net sales of 41.5 million compared with 47.7 million in the 2014 third quarter. As mentioned earlier the revenue reduction from the sale of the Game branded business this past March was the primarily reason for the decline. The respect of our branded segment business is experiencing sales growth and solid margin improvement with the exception of the slight sales decline at Soffe. Overall Soffe's main sales channels remained flat with the prior year with the 640,000 sales decline coming principally from a soft price channel. Although Salt Life had record sales growth in April, our ability to ship products slowed in May as we began the process of moving our distribution from least base in Phoenix City, Alabama to owned real estate in Fayetteville, North Carolina. Due to the temporary disruptions from this move Salt Life 4.1% sales growth during the June quarter was less than originally anticipated. Jump suit sales for 2015 third quarter were up slightly with good gross margin improvement both sequentially and over the 2014 third quarter. Continued double digit sales growth at specialty retailers offset some weakness in other sales channel. Jumpsuit website continued it's strong growth increasing 22% for the quarter and 61% year-to-date. We reduced overall selling, general and administrative expenses by 1.4 million from the prior year quarter bringing SG&A as a percentage of sales to 16.3% versus 17.1% in the prior year period. The reduction principally resulted from cost savings measures that we put in balance almost a year ago offset partially by higher marketing expense in our branded businesses. For the first nine months SG&A as a percentage of sales is 18.2% versus 18.4% in the prior year. During the June quarter the fair value of Salt Life contingent consideration was remeasured based on historical and projected sales level resulting in a reduction in the fair value of the contingent consideration of 630,000. As a reminder the contingent consideration is associated with the acquisition of Salt Life and will be paid to the former owners of Salt Life based on net sales of Salt Life products during calendar 2019. Each quarter the contingent consideration is adjusted to fair value based on the actual sales to-date and the remaining time to the measurement period of 2019. We do still expect sales in calendar 2019 to approximate the expectations for calendar 2019 sales used in the valuation of the contingent consideration and acquisition. However based on the current sales level the accrual for the contingent consideration was adjusted downward to it's current fair value. Our effective income tax provisions for the nine months ended June 27, 2015 was 40.4% excluding discreet tax items associated with the gain on the sale of the gain during the March quarter and the exercise of stock options in the June quarter the effective tax provision on normal operations for the nine months was 4.2%. We anticipate our effective tax rate for fiscal 2015 to be approximately 20%, however changes in the mix of the U.S. taxable income compared to profits in tax free jurisdictions can have a significant impact on our overall effective tax rate and will not be known until we complete our September quarter. Capital spending was 1.8 million during the quarter and 4.2 million year-to-date. We anticipate our fiscal 2015 capital expenditures to be approximately 9 million which will include approximately for the expansion of textile to manufacture a product which should be purchased fabric and reduced cost by leveraging internal operation. Depreciation and amortization including non-cash comp was 3 million for the quarter and 8.5 million year-to-date and we believe it will be approximately 11.5 million for the full fiscal 2015. During the June we repurchased 30,700 shares of our common stock at an average cost of $14.35 per share for a total cost of 440,000. As of June 27, we have 4.3 million remaining authorized from our Board for share repurchases. We expect to continue repurchasing our stock under our stock repurchase program as we believe the intrinsic value of the company is significantly higher than its current share price range. Total debt decreased 22.9 million from March to a 112.2 million in June. As anticipated inventory levels decreased both in units and in terms of cost per unit. This coupled with a strong earnings during the quarter gave us the ability to pay down our debt significantly during the quarter. We anticipate continued strong operating cash flows during the September quarter that after offset for capital expenditures and anticipated share repurchases should further reduce our debt by another 10 to 15 million in the fourth quarter. We believe that Delta's performance in 2015 fiscal third quarter points to a strong finish for the 2015 fiscal year in an opportunity for robust profitability growth in fiscal 2016. I will now turn the call over to our Chairman and CEO, Bob Humphreys, who will provide you with more detail on our outlook for the business.

[Bob Humphreys:]

Thanks, Deb and thank you all for being on the call with us today. Delta Apparel had a very good quarter making progress in a number of areas of our business. During the quarter the company not only turned the corner in terms of sales and net income growth but showed vast improvement in other areas such as gross expansion and general and administrative cost reductions resulting in significant improvement in our operating margins. The strategic initiatives that we began implementing a year ago had proved successful in regards to call savings, efficiency gains, profit growth and better service to customers and we believe the best is yet to come. We continue to invest in areas of our business where we expect to yield high returns. The expansion in our Honduran textile facility, Saber [ph] textiles is underway. All the way equipment is on order and we should receive it before the end of the calendar year. We expect the equipment to be running in the first calendar quarter of 2016 and we should start seeing benefits shortly thereafter. By extending our production capabilities into open-width fabrics we will reduce our reliance on purchase fabric which should allow us to better service our customers and expand our product offerings. In addition we will be further leveraging the figures calls of our internal manufacturing production. Overall we expect to achieve annual savings of approximately $2 million from this investment. E-commerce is another area we believe we can make investments which should yield high returns. In the June quarter we grew sales on our internal website by 56% with each of our direct to consumer sites seeing growth in excess of 20%, we continue to enrich our E-Commerce presence and recently add several new functions to further enhance their customer experience. We’re also making investments in E-Commerce in our Art Gun business. Art Gun's facility rose cutting edge equipment and industry leading proprietary software specifically to view to facilitate e-commerce business. We mentioned last quarter that Art Gun's technological competencies were also being leveraged internally to enhance Junk Foods direct to consumer business by giving Junk Food more flexibility in it's e-commerce product offerings with web exclusive designs. This feature is now operational and producing high margin revenue, additional Art Gun's digital printing capability compliments Delta Activewear by providing great opportunities for value added services for our customers [indiscernible] now well known for it's creative and ingenuity continues to build it's direct to consumer business through it's flagship store [indiscernible]. As an example in June, Junk Food partner partnered with Connor Franta, an American YouTube blogger and internet personality who self-named main channel on YouTube has over 4.5 million subscribers. Together we launched an exclusive capsule of apparel to be sold only on the Junk Food e-commerce side and at the Junk Food retail store. [Indiscernible] stood in-line for over 24 hours to get a chance to meet at Conrad store. Over 2000 fans visited with some traveling over seven hours to come see [indiscernible], already has in place plans to do other similar events. Junk Food's retail saw sales and it's store grew over a 100% from a prior year June quarter, an increase over 30% from the March quarter. We see the third quarter as the turning point for Soffe, both these sales were nearly flat compared to the prior quarter and the business broke even for the first time in several quarters. The core Soffe short in various colors and patterns is trending well with consumers and a number of major retailers are expanding the retail doors with the short. We look forward to some of the new fall line on the retail floor for back to school and is expected to resonate well with consumers. Soffe has a large consumer fan group and it's direct to consumer sales continue to increase with growth of 24% during the June quarter and 32% year-to-date. As Deb mentioned during the quarter we began moving Salt Life's distribution center from Phoenix City, Alabama to Fayetteville, North Carolina. This allows us to leverage real estate we own instead of leasing distribution space. The DC will be specifically setup to distribute Salt Life products efficiently to better service our customers. In addition to having a distribution on the same campus where we’re printing Salt Life graphic tees we should be able to significantly improve stock hold times and lower cost by avoiding freight expenses between facilities and duplicate handling the product. Unfortunately the moved caused disruption in shipping Salt Life products which resulted in a single digit growth rate that is uncharacteristic for Salt Life. Currently we’re working through the order backlog and [indiscernible] are being corrected. This is a temporary situation and we’re not seeing any decline in the strong demand for Salt Life products. In fact heavy order backlog is shipped in June, Salt Life's [ph] growth in the third quarter would have been nearly 30%. Salt Life's gross margin remain strong having expanded by about 300 basis compared to the prior year quarter. Salt Life has received an overwhelming strong response through this new spring line. Our major regional and national retailers or add new doors in expanding product categories. We feel confident that the new efficient distribution center with this impaired cost savings and improve customer service that becomes fully functional, Salt Life will return to it's traditional strong double digit growth rates. We’re excited about the positive trends we’re seeing in each of our business units. We have completed a lot of hard work over the past year to improve the company and we’re now seeing the results of our efforts. Still the increase margins have expanded and the bottom-line has improved as we expected it would. We will continue to be diligent in our efforts to build off the recent success to drive further growth and profit expansion in the coming quarters. Bottom-line we believe we have built a foundation that should provide steady growth and improved profitability for Delta Apparel. Operator at this time we will be happy to open up the call to any questions.

[Operator:]

[Operator Instructions]. And we will go first to Dave King with Roth Capital Partners.

[Dave King:]

I guess first off congrats on the strong quarter, to say that out of the gates and I guess along those lines I was just particularly encouraged by the growth in private label this quarter I guess can you comment on what might be driving that and then turning to off that, it looks like the catalog business some of that business might have been down if I saw that correctly and I'm just curious Bob, if you have any color there in terms of you know how you’re thinking about the environment these days, and it looks like you’re able to maintain pricing, given what -- I think some of your competitors are doing , so maybe you can just talk a little bit about that and sort of the strategy there. Thank you.

[Bob Humphreys:]

Probably it's a little bit confusing between product label this catalog tee. So demand for both of those products was strong during the quarter. I think for a couple of three different reasons. Our traditional private label business with kind of the major activewear brands is good just from a number of different reasons we have been working to end customers which we have been successful at and really cycled into the full, shipping time with them, our existing customers asked customers ask us to make more product to own our Fun Tees platform, we ship more product than we ever have. At the same time demand for undecorated tees was steady and what you saw is some movement from blank tees to those traditional customers that we now decorate and rebrand for them. So we categorize that as private label but we’re really selling that product to traditional to our blank tee customers who are just at having us do more value added to the product.

[Dave King:]

Okay, and then in terms of just the ability to maintain pricing it sounds like that sort of what the ability to do that in this environment and is that in the strategy on a go forward basis, it's the value add sort of scenarios but then also, are you guys also expanding the mix of the products that are available as well as we go forward?

[Bob Humphreys:]

We certainly have. We have added 3 or 4 different product categories over the past 12 months as some of them are anniversary now like our performance products in place. So we see that driving additional volume and better profitability. We saw pricing barely stable during the quarter and we expect that for the next at least at least several months anyways we’re still in a strong shipping environment. Our business in private label and undecorated tee started out our fourth quarter that we are just in are very strong.

[Dave King:]

Then switching gears maybe a bit, in terms of the Salt Life DC transition, when did that exactly occur and in terms of in sounds like you’re still necessarily caught up there but I think but demand still remain strong. I guess along those lines have you seen any cancellations, do you anticipate any cancellations and by when do you think you might have that fully addressed in terms of being caught up?

[Bob Humphreys:]

Yes so just a little bit of background on that, when we first contemplated selling the Game business our intent was to not move this distribution process until the December quarter which is typically our slowest shipping quarter and then just through that process and win the leases expired on the building, we needed to move that up. So we ended up moving it into a busier time of the year for us. We had strong shipments through April as Deb said I think our strongest growth might be ever for Salt Life and then we did hurt our ability to shift in May and June, we certainly started catching by the end of June but we’re still not completely called up so far. We proactively reached out to our major customers and they are very supportive of us and continue to give us more orders and continue to make significant expansion plans going into what will be our next fiscal year particularly starting with spring. We ended up really moving from 2 DCs in Phoenix City, we will be in one DC really setup for Salt Life. We started shipping $4 million - $5 million out of that DC in Phoenix City and grew mid-$20 million kind of revenue so it's natural as you’re doing that to have to move into some additional space and larger and more efficient space.

[Dave King:]

And then I guess lastly and then I can take the rest offline, in terms of the outlook so it sounds like if I heard you correctly Deb you said fiscal '16 obviously still expects improving profitability, also I guess just obviously you’ve a lot of these initiatives that are driving that in terms of gross margin, expansion savings but how are you guys thinking about the top line as we move forward from here both for the rest of the year and what sort of embedded in that thought of driving the profitability improvement in '16 what's embedded in the top line? Thank you.

[Deb Merrill:]

You know as Bob mentioned in his discussion point you know we do see a lot of positive things happening across our business units that all being said the retail environment is not very strong right out there and we have to take that into consideration. So we believe in coming quarters we should continue to see growth across our business unit but we’re being cautious about that just with what the environment is. So I would say not, that we should see single digit growth in the fourth quarter and out in the coming quarters but being conservative in that. I mean in this environment if we can have just low single digit organic growth I think we’re much improved over what we’re seeing with the lot of competitors and out there in the retail market place.

[Operator:]

[Operator Instructions]. We will go next to Lynn Perry with Wilen Management.

[Lynn Perry:]

I have some questions on Salt Life, can you talk about the number of doors you’ve got it in the past year and in addition since it's your prime selling season, do you have any feel for how well the item sold through, so you can forecast, we will be adding more doors next year.

[Deb Merrill:]

I would say in total numbers we don’t have a door count right now, we are in the process of several expansions with customers not only new doors with existing customers but then some potential new retailers that should come on-board in the coming quarters so we don’t have specific numbers but I can tell you that the door count does continue to expand and we expect that will continue in coming quarters. And then the existing doors that we have we will also mention that we have a number of them that are expanding the product categories so there might not be expansion in the number of doors but then they also are expanding the category that the existing doors are carrying.

[Lynn Perry:]

To me it seems like your Salt Life line had a lot more appealing items this year but in terms of like [Technical Difficulty] do you plan on doing a wholesale upgrade to the Salt Life line, another by adding updepth in some areas or stepping from others.

[Bob Humphreys:]

Particularly which we’re obviously selling right now I would say is really a big step forward as we mentioned we got just overwhelming response with our retail customers and it really start showing a true lifestyle product line even though consumers thought about Salt Life as a lifestyle brand in the product life started primarily with T-Shirts and the headwear but when you see the spring wear you really get that feel of a true lifestyle product lines, so we’re very excited about the reaction to that and we will have our most aggressive buyers on our fashion products that we have ever had for Salt Life. We have been very conservative on those buys and generally run out of them early in the selling season but several of those products are becoming staples and we’re certainly planning on expanding our inventory of position on those for spring of '16/

[Lynn Perry:]

No I just got back from the beach vacation and Salt Life was every place it was on the locals, surf boards, t-shirts, it was every place. And then lastly on Salt Life in terms of marketing you’re going to devote more dollars here and most of the money going in the digital direction?

[Bob Humphreys:]

Yes, so a couple of things. I think we’re pretty much set for calendar '16. We do a little bit of print ad mostly in surf and standup power board. We have devoted a lot to digital with our e-commerce sites and also the Salt Life YouTube channel. We have got a new country music singer coming on board that will be announced in the next couple of weeks and we were just announced as the title sponsor for the standup power board championship which is going to be held in Dana Point in October, it's going to be a real big event. I believe the largest pursue for a standup power board competition. So that’s pretty much set for the upcoming year and we think we’re getting a lot of bang for our buck particularly on the social media aspect of Salt Life.

[Operator:]

And our next question comes from Mike Hughes with SGF Capital.

[Mike Hughes:]

Couple of questions for you, first one I'm going to start with [indiscernible] I think traditionally the September quarter is the strongest quarter there, but I think one of your large customers have announced that they are going to close a large number of doors. How do you feel about that business just moving from June into September well show it's traditional sequential strength?

[Bob Humphreys:]

It will and Mike based on the order backlog we had going into the quarter we think we will have large growth over last year September quarter. So, we’re certainly we’re the retailer you mentioned and believe the vast majority if not 100% of the doors that they are closing are doors that Junk Food was not in.

[Mike Hughes:]

And then I think in the past you had mentioned potentially testing Junk Food in another large retailer, any update on that?

[Deb Merrill:]

We have had some new retailers picked up especially in the specialty channel and those are going well and continue to grow. I think we have mentioned those specialty doors that we have been in have been growing at about 20% for the last several years and we expect to see continue growth in that sales channel which encompass a number of those doors that we have been working with.

[Mike Hughes:]

And I may have missed this because of the number of questions that were asked on Salt Life but the loss sales at Salt Life which I would estimate it around $2 million, is that a correct number?

[Bob Humphreys:]

Yes a little bit less than that.

[Mike Hughes:]

Will you recapture the lost sales in the September quarter?

[Bob Humphreys:]

Well certainly some of them, the order backlog the thing that you worry about is when you’re in a situation where you can't ship replenishment orders particularly with smaller retailers you can't lose sales that group of vacationers or what have are simply [indiscernible] when the product gets there. So it certainly doesn’t help your overall sales but we expect to help sales growth in the September quarter as we did in the June quarter but just on according to our expectations.

[Mike Hughes:]

And then you sound very constructive on Soffe at this point, remind me, you’re introducing the refreshed fall line in the September quarter, is that correct? And then what type of growth would you expect out of that business line in September?

[Bob Humphreys:]

I don’t think we have put forth a specific growth plan probably on certainly -- we were encouraged with the spring line and it's sell through, good response to our fall line which is our seasonally our slower line and a lot of excitement around our spring line that we’re out there showing customers today. But at this point happy to happy Soffe back, we think stable on sales standpoint basically breakeven at the operating line in the June quarter and expect to be pretty familiar.

[Mike Hughes:]

Okay, and then the $2 million in savings when will that start to hit the P&L savings?

[Bob Humphreys:]

Yes so we should start seeing that so that’s an annualized rate so we will start seeing that in the March 2016 quarter and then it will take about another quarter for it to really start running through cost of sales. But we will start manufacturing that product probably at the beginning of the March, 60 to 90 days of that savings will start rolling through, can be seen in higher gross margins.

[Mike Hughes:]

Okay. And then just two detailed questions on the P&L. I believe the interest expense was up sequentially despite the nice reduction in the long term debt so could you just speak to that?

[Deb Merrill:]

The interest expense in the June quarter we end up with our highest working capital kind of as you’re going through and ending that March quarter into the beginning of the June quarter and then that starts coming down quite dramatically as you get towards the end of that June quarter. So we paid off a lot of debt really towards the end of June quarter so the interest expense was certainly on some higher debt levels that we had at the beginning of the quarter and then should come down now in our September quarter as we pay down some further debt in that September quarter.

[Mike Hughes:]

And then one last question, the other income line I think it was around $425,000 which was a little bit higher than expected, what contributed to that?

[Deb Merrill:]

We had some investment income on our joint venture that we have a joint venture in Honduran and that contributed t0 that as well, so that about a quarter of a million dollars and in that line item we also have our foreign currency gains and then some income on where we sublease some of our facilities out to other people is in our line item as well.

[Mike Hughes:]

Well the $250,000 piece is that were occurring from this point forward?

[Deb Merrill:]

That is basically. We book that investment income in about a once year when we get the audited financial statements from that JV and so that was recorded in the current year, so that’s not a quarterly reoccurring but it does continue year-over-year.

[Bob Humphreys:]

That’s our investment in the Green Valley Industrial Park in Honduras where our textile facility is located.

[Operator:]

[Operator Instructions]. And we have no more questions at this time.

[Bob Humphreys:]

Okay, well thank you all for joining us and we look forward to updating you on our full year results in just a few months. Thank you.

[Operator:]

This concludes today's conference call. Have a wonderful day.