Delta Apparel, Inc.

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?

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.

Turning first to our Delta Group segment, sales growth was led by the demand for active wear apparel, particularly with our retail direct customers and with the global and regional brands that utilize our full-service supply chain. We are there every step of the way for these customers from product development to shipment of their branded products, with the majority of products being sold fully decorated and ready for the retail shelf.

Over the last several years we have broadened our customer base and expanded our product capabilities and we are seeing these benefits with 40% year-over-year sales growth this quarter in the sales channels. Global trade uncertainty and the need for shorter lead time and now the effects caused by the pandemic has led most businesses to reevaluate the reliability of their supply chain.

We firmly believe that our flexible full-service approach utilizing our sophisticated business system and our near-shore and onshore manufacturing capabilities make Delta Apparel an ideal supply chain partner. We are seeing continued business opportunities with expanded programs for our existing customers, along with business from new partners interested in utilizing our services.

We remain encouraged by the accelerating adoption of our products and services in the direct to retail channel. Utilizing our offshore manufacturing along with our US decoration and packing operations, we have been able to deliver quick turn fully stocked graphic T-pallet displays to retailers which have performed extremely well at retail and have led to ongoing fulfillment in new programs as we progress through the year.

We're very proud of our ability to drive performance in our catalog business, despite the inventory constraints we are working through. Our teams work exceptionally hard to accelerate the ramp up of production to all-time record levels.

We are ahead of our initial goals and are now producing more dozens a week within our internal manufacturing platform than ever before in our history. The Soffe integration remains on track for completion by the end of the fiscal year.

As a reminder, in January we kicked off the integration of Soffe into our Delta activewear sales and inventory business system, added the complete Soffe lineup to the Delta B2B ecommerce site, as well as launched a new consumer Soffe.com site directly integrated with activewear ERP platform. This has led to a better customer experience and improved inventory management.

Now operating with integrated sales and marketing teams, we have already successfully launched several targeted social media and email advertising campaigns, showcasing the broad range of Delta, Soffe in-source branded products. Bringing together both Delta and Soffe under one integrated activewear umbrella is a win-win for both our customers and for Delta Apparel.

We have set the stage to expand our market reach while simultaneously enhancing our margin potential. We are in the process of relocating the majority of Soffe inventory to our new fully integrated Phoenix Distribution Center, where we will be servicing Soffe products on a go forward basis.

Our Soffe military business will continue to be serviced from our North Carolina production and distribution facility. As we mentioned on our December quarter call, with the Soffe transition into the Delta platform, we expected to see incremental expenses of about $0.08 per diluted share in the March quarter.

While we are on pace to meet our completion timeline, we were able to lessen the impact of this in the March quarter and spread some to the June quarter where we believe the expense will be substantially offset by cost savings from the integrated facility. Importantly, we continue to anticipate annual benefits from this integration initiative in the range of $0.12 to $0.15 beginning in fiscal 2022.

Looking at our DTG2Go business, we had a slower start to the quarter but ended the period on a strong note, with March unit growth up in the double digits. The early softness in the market was experienced across our customer base, as consumer sentiment was hesitant with the uncertainty surrounding the COVID pandemic, the stimulus packages and unemployment rates and related incentives.

Also as a traditional retail channel became more prominent in our DTG2Go business mix, we've continued to build a greater understanding for the seasonality of the business trends, with the post-holiday law having a larger impact than originally anticipated early in the quarter. As we closed out the March quarter and continuing into April in May, we have seen a resurgence in orders coming from existing customers, as well as newly launched partners, many of whom are forecasting to do significant volume with us as they ramp up.

The traditional retail channel continues to grow with more than triple the units shipped compared to the prior year quarter. We continue to see this channel of distribution as a significant future growth opportunity for DTG2Go, especially with our new strategic partnership with Dallas based Autoscale.ai, whose technology automates the product design, marketplace listing and advertising management for on demand retail.

We believe that one of the headwinds with the growth of the on-demand retail has been the time and energy to take graphic libraries and turn them into online product listings available for sale to consumers on limitless garments styles and colors and across multiple marketplaces. While DTG2Go's on demand supply chain takes care of everything once the consumer buys the product, we wanted to expand our solution to give customers the tools to quickly and efficiently bring more graphic designs for the on-demand model.

Autoscale is the automation software that does exactly that bringing products to market faster with fewer resources. We believe that combining DTG2Go's on demand supply chain with Autoscale's design automation technology will further revolutionize the on-demand apparel retail.

Utilizing our proprietary technology and our expanding geographic network, DTG2Go is able to quickly and easily scale up operations to support the rapidly growing on demand industry. As we noted last quarter, we are now operating nine fulfillment facilities, including two locations recently opened in the December quarter; one is the first in the industry our on-demand DC and the second is our new Phoenix Arizona integrated distribution and fulfillment center.

With the Phoenix location, we operate five facilities fully integrated with our Delta Group distribution centers, providing a seamless supply of garments, while eliminating a significant amount of non-value-added costs and further leveraging our facility costs. Our customers continue to realize the benefits of the use of the Delta garments with DTG2Go's usage of Delta catalog book [ph] reaching a new record high of approximately 50% utilization in the March 21 quarter compared to 30% in the prior year quarter.

This trend is promising as it creates a more efficient operation, reduces garment costs for our customers and lowers working capital needs in the business. We will look to expand our network through potential future DTG2Go facilities within our remaining Delta DC, the addition of new on demand DC and expansion into international markets.

With respect to our Salt Life Group, as evidenced by the 15% second quarter sales growth, demand for the Salt Life brand remains very strong. The Salt Life direct-to-consumer business more than doubled compared to last year, led by branded retail store sales growth of 175% inclusive of same store sales gain of 25%.

Our retail stores have continued to drive impressive results and we could not be more pleased with the outstanding performance at our new stores including Estero in Palm Beach Gardens, as well as our locations in key vacation destinations, including Destin, Tampa, Key West and Daytona, Florida. As we kick off the summer vacation season, we look forward to seeing consumers experience the lifestyle brands in person at our retail doors, with new locations opening in Myrtle Beach, South Carolina, and then next [ph] in Texas.

Consumers also continued to actively engage with Salt Life while online with e-commerce sales up over 40% for the period. The strength of Salt Life's e-commerce business was driven by all around impressive KPIs for the quarter, including 40% traffic growth and first time SaltLake.com visitor growth of 35%.

Consumers are spending more time on the site, which we believe is leading to growth in average order values compared to the same period last year. They're also visiting more often than not on their mobile devices with over 70% of visitors and over half of purchases originating on their phones or tablets.

During the March quarter, consumers also subscribed themselves to our email list at a pace 75% greater than the new email subscriptions in the March quarter last year. This is important as about a quarter of all online sales these last three months originated from the email channel which bodes well for future growth.

We could not be more excited about the strength of the Salt Life brand and have invested in fueling the lifestyle brand growth with the launch of the Daily Salt. Team members influencers and staff will showcase guide and demonstrate how to videos and provide exclusive articles from amazing destinations around the world covering anything you want to know about living the Salt Life.

The Daily Salt is another way we are authentically engaging with enthusiasm for the brand and everything it represents. We also engage on multiple social media platforms, which saw a 10% year-over-year increase in followers to Salt Life, including the launch of our Salt Life branded LinkedIn page.

Notably, our popular YouTube videos saw a seven-fold increase in viewership this quarter compared to last year since we began more actively promoting the channel on our website. With the strong results from our retail and ecommerce site, we have increased our direct-to-consumer penetrations to 25% of total sales from 15% last year.

This is meaningful growth for our strategy to ultimately achieve a two-thirds mix of Salt Life's direct-to-consumer sales. At the same time, our wholesale channel continues to perform well with our retail partners.

We ended the second quarter with our largest order book on record for Salt Life, which should lead to strong Salt Life sales for the back half of the year. Our results showcase the benefits of our broad customer base in diversified channels of distribution and we believe the momentum is just beginning.

We're excited by the many opportunities we see for continued to top and bottom-line growth. Let me now pass it to our Chief Accounting Officer, John Tester for a more detailed review of our second quarter financial results.

John?

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.

Just as we've been discussing inventory constraints, as a headwind to growth, the difficulty in obtaining labor in the US has become a challenge, as we're competing for labor against increased unemployment payments, and other programs available to non-working individuals. These labor constraints impact us across our businesses, including in our US production facilities and in our distribution and retail stores.

While sales dollars increased approximately $12 million compared to prior year, our selling general and administrative expenses decreased $0.8 million or 4%. The savings are from cost reductions implemented during the pandemic that have continued, including fewer administrative staff, reduced travel expenses, and a more digitally focused sales and marketing strategy, which more than offset the additional costs incurred and the Delta Group for the integration of Soffe into the activewear business.

Operating income for the quarter more than doubled to $7.6 million or 7% of sales compared to $3.6 million or 3.7% of sales in the prior year. Net income for the quarter was $4.4 million, or $0.62 per diluted share, a significant increase to last year in which reported net income was $1.3 million or $0.19 per diluted share.

On an adjusted basis, excluding the impact in the prior year March quarter from the government mandated shutdowns in our offshore manufacturing, as the pandemic began, earnings were $0.39 per diluted share. With regards to our balance sheet and liquidity, total inventory as of March 2021 was $148.5 million, down $48.8 million or 25% from a year ago, as we enter our seasonally strongest quarter of the year.

As previously discussed, the stronger than anticipated sales trend we have seen over the past nine months, combined with the hurricane disruptions experienced during the December quarter impacted our normal seasonal inventory builds. We are continuing to ramp up production at an accelerated pace and are already producing an all-time record levels to replenish inventory to normalized levels before next year spring selling season.

Total net debt increased 5.4 million from December 2020 to 135.2 million as of March 2021, but is down about $23 million from net debt levels a year ago. Cash on hand and availability under our US revolving credit facility totaled 44.2 million as of March 2021, a $500,000 increase from December 2020 and a $14 million increase or approximately 50% increase from a year ago.

We spent approximately 1.5 million on capital expenditures during the March quarter compared to $4.1 million a year ago and we continued to expect capital expenditures in fiscal 2021 to be about $20 million. Our focus is primarily on digital print expansions, manufacturing equipment to expand capacity and broaden our capabilities, additional Salt Life retail store openings, and business systems and technology advancements to enhance our operational efficiency.

As we look back on our business, we are now at the one-year mark from when the pandemic began disrupting our operations in those final weeks of March 2020. I know we all would never have guessed the impact that this would have had on the world.

We are so pleased with a quick recovery we have had in our business. As we compare the performance of Delta Apparel compared to pre-pandemic fiscal year 2019, beginning in the September 2020 quarter and continuing through the first half of fiscal 2021, our revenue has been trending at or above the levels of fiscal 2019, including our March quarter being up approximately 6% compared to the fiscal 2019 quarter.

And even more importantly, we have achieved strong gross margin improvement and significant profitability expansion in the prior three quarters as compared to fiscal 2019. Now we would expect the same dynamics to continue in the back half of fiscal 2021, if we build on the momentum experienced these last three quarters.

While the inventory constraints are a headwind to sequential top line growth in the June quarter, this should begin to ease in coming quarters as our record level production output begins to build our inventory levels. With respect to inventory, it is important to note that cotton prices and other inflationary cost, input costs, are having a large impact on our product costs.

We will begin to sell through our higher cost inventory in the September quarter, which will put some pressure on gross margins compared to the March and anticipated June quarter margins. Having said that, we believe that our margin enhancing strategies we put into place over the last several quarters, coupled with the reductions we've achieved in SG&A expenses should allow operating margins to remain strong.

Let me now turn the call back to Deb for her final thoughts.

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.

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.

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.

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.

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.

Thank you very much.

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?

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.

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?

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.

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?

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.

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?

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.

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?

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.

Excellent. That was a heck of a quarter.

Thanks, fellas.

Thank you.

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.

Thank you.

Thank you.