Delta Apparel, Inc.

Thank you and good afternoon to everyone participating in Delta Apparel's fiscal 2022 first quarter earnings conference call. Please note that today's call is being recorded. Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer, and Simone Walsh, Vice President, Chief Financial Officer, and Treasurer. 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 reports filed with the Securities and Exchange Commission, including the company's most recent Form 10-K and Form 10-Qs. These documents identify 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 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. I'll now turn the call over to Delta's Chairman and Chief Executive Officer, Bob Humphreys.

Thank you. Good afternoon, and thank you for your interest in Delta Apparel. I'd like to start our call today by welcoming and introducing you to Simone Walsh, our new Vice President, Chief Financial Officer, and Treasurer. Simone joins Delta Apparel from Novolis, Incorporated, where she served as Vice President, Deputy Controller. Previously, Simone served as Chief Accounting Officer for PRGX Global, Incorporated, and held senior finance roles at several other publicly traded retail and manufacturing companies, including Sony Corporation, Coca-Cola Enterprises, and the Home Depot in London and in Atlanta. Simone started her career at Ernst & Young and is both in and Australia and British, a charter accountant. She's also a US citizen. We are extremely pleased today to tell you about our outstanding start to fiscal 2022 and strong first quarter performance, which outpaced our expectations and put us in place to meet, if not exceed, our revenue and earnings goals for fiscal 2022. Before we get to the financial results, I want to take a minute to recognize and thank our nearly 9,000 employees across the United States, Mexico, Honduras, and El Salvador. The last two years have been challenging on so many fronts, but our teams have remained focused on moving our company forward by executing our business plans and providing outstanding products and innovative services to our thousands of customers across many channels of distribution. We have a long and proven track record of success navigating challenging industry dynamics. Over the past several quarters, we have been faced with inflationary pressures, supply chain disruptions, and labor shortages, which our teams have tackled head on with tremendous agility, flexibility, and innovation resulting in outstanding operating results for the many constituent groups we consider a part of our business purpose. As you saw in our press release, sales for our first quarter ended July 1st, 2022 for $110.7 million, an all-time record for the December quarter, and represented organic growth of approximately 17% from the prior year December quarter. Our net income of $3.6 million was also a record for the December quarter and equates to 51 cents per diluted share ahead of our internal expectations. This was another quarter represented by broad-based performance with shareholder value creation in both segments of our business. Salt Life Group achieved sales of $8.8 million, up 24% from the prior year, and ended the quarter with strong orders for our wholesale channel, while at the same time continuing to build direct consumer engagement on our social media platforms, which should continue to drive strong growth in our higher margins direct-to-consumer channels of distribution. We opened one new Salt Life retail store during the first quarter in Texas City, Texas, and have already opened a new store in Sarasota, Florida this quarter, and are planning to complete store openings in Fort Lauderdale, Florida, Foley, Alabama, Hilton Head, South Carolina, and Boca Raton, Florida over the next several months. We are in continuing discussions for several additional leases and are planning to end this fiscal year with approximately 20 Salt Life retail stores in operation. For doors open five quarters or longer, we registered same store sales growth of 18% from the prior year December quarter. Consumer demand and engagement on our Salt Life e-commerce site has been strong, despite going into the quarter with a limited inventory position that became more constrained as the holiday season progressed. limiting our revenue through this channel of distribution. To better service this important channel and more directly interact with our consumers, we have recently strategically reconfigured space within our existing distribution center in Fayetteville, North Carolina, designed to reserve and manage inventory dedicated for availability and servicing our consumer shopping on saltlife.com. Saltlife continues on its journey of strong organic growth and the broad demand that our products has accelerated over the last six quarters. While we continue to navigate supply chain issues that face many in this current environment, as you can see from our sales results, our team has executed magnificently to allow us to deliver strong revenue growth despite these industry challenges. We are shipping our spring wholesale business as we speak and are expecting continued growth and the associated margin expansion with our direct-to-consumer channels growth. Our Delta group also delivered strong sales growth across all channels of distribution, and on a consolidated basis in this segment, we grew 16% for the quarter to a first quarter record of $101.9 million. We are now seeing channels of distribution that had been more heavily impacted by COVID start to normalize, and all channels are now in a growth mode, which will ultimately help us ship our targeted product mix. Moreover, we continue to see additional retailers and global brands seek increased production from the vertically integrated supply chain that Delta Apparel has to offer. We're currently installing additional equipment in our textile sewing and screen print locations in Central America, which will allow us to continue to increase our output as the year progresses. The Delta Group, like many in our industry, continues to be impacted by limited supplies of raw materials, transportation services, and other supply chain bottlenecks. However, to date, we've been able to manage through these challenges further building output by utilizing our vertically integrated manufacturing network. Our ability to meet customer demand has not only resulted in strong top-line performance but allowed us to broaden our services and offering with both existing and new customers. Over the last year, we have increased selling prices on the majority of our products to mitigate most of the inflationary pressures impacting our supply chain. In addition, we are now providing more value-adding services such as screen or digital printing and retail-ready services than any time in our history, which further increases our average selling prices resulting in increased consolidated revenues. Our increased unit growth, along with a richer mix of services delivered, is allowing us to also increase our operating profits by leveraging our fixed costs in our manufacturing and SG&A areas. During the December quarter, we also reached a number of significant milestones in our DTG2Go business. Our revenue was a new quarterly record with growth of approximately 17% over the prior year. We were able to move from a beta test mode to a production environment on our new printing equipment while we continue to take delivery of and install additional production equipment through the holiday season. As previously announced, we onboarded several new customers on the DTG2Go platform during the quarter. This will provide the foundation for growth as the year progresses. Our Digital First methodology, which we developed in conjunction with a number of key market participants, was implemented in the quarter. We have made significant investments in DTG2Go's Digital First retail model, ensuring digital graph prints meet the high-quality standards required for brands, retailers, and intellectual property holders. We believe the quality, look, and feel of the garments created through this process will continue to differentiate us in the marketplace and will be a key driver of the growth we are expecting in this business. In addition, 55% of the DTG2Go units we produced in the December quarter were printed on Delta garments, creating a more efficient operation, reduced garment costs for our customers, and lower working capital needs in the business. Now let me turn the call over to Simone, who will review our first quarter business highlights and financial results, and then I'll join the call prior to our opening for questions. Simone?

Thank you, Bob. I'm delighted to have joined Delta Apparel at this exciting time for the company. Let me echo Bob's comments for both our Delta Group and SaltLife Group. First quarter fiscal 2022 results were outstanding, and we are progressing with strong, positive momentum. Over the past year, the company completed the integration of our Sophie brand into our activewear business, consolidated and modernized certain distribution operations, and achieved record levels of manufacturing output. In addition, extensive investments in research and development at DTG2Go developed into our digital first strategy, which has already resulted in the onboarding of several new key customer relationships. And the extraordinary growth we saw in SaltLife in fiscal 2021 has continued to accelerate, and we have the foundation in place for further organic growth. Our multi-year strategic initiatives, many of which were put in place pre-pandemic, are maturing nicely and our first quarter results are reflective of our ability to capitalise on market opportunities to drive broad-based organic growth in our business. Now, I'll go through a more detailed review of our first quarter financial results. Net sales were $110.7 million compared to $94.7 million in the prior year. with Delta Group segment growth of 16.3% and 24.3% growth in the Salt Life Group segment. We saw growth across the Delta Group segment in Delta Direct and Global Brands and Retail Direct, with strong demand across the channels of distributions we serve. As a reminder, in our Global Brands and Retail Direct sales channels, we're a supply chain partner to Global Brands, from development of custom garments, to shipment of their branded products, with the majority of the products being sold with value-added services. We also serve retailers by providing our portfolio of Delta, Delta Platinum and Sophie products directly to both their retail stores and through their e-commerce channels. During the quarter, we also saw increased sales in DTG2Go with the onboarding of several customers and a strong holiday showing. The growth in salt life resulted from both strength in our wholesale business together with continued growth in our retail store sales, with same store sales growing 18% over the first fiscal quarter of fiscal 2021. Gross margins contracted 60 basis points from the prior year to 20.8% of sales. Gross margin contracted in both business segments This was in line with expectations as we continue to see inflationary pressure in our manufacturing and sourcing platforms. Selling, general and administrative expenses increased $1.5 million, representing 15.8% of sales, as compared to 16.9% of sales in the first quarter of fiscal 2021. We are seeing the benefit of the previously mentioned integration of our Sophie brand into our activewear business, while also leveraging our fixed costs against increased sales. Operating income for the quarter increased 90% to $5.9 million, or 5.3% of sales, compared to $3.1 million, or 3.3% of sales in the prior year, first quarter. Net income for the December quarter was $3.6 million or $0.51 per diluted share, an increase of 313% compared to $900,000 or $0.13 per diluted share for the same period in the prior year, driven by higher operating profits and a lower tax rate. Our balance sheet is solid. Net debt, including capital lease financing and cash on hand, was $139.6 million. While our debt increased from September 2021, this was in line with expectations as we continued to build inventory to meet demand. Our inventory was $183 million at the end of the first quarter, an increase of $21 million from September, but below our target for the spring shipping season. This is both an increase in the number of units on hand and a reflection of high inventory value resulting from increases in raw material, transportation and labour cost. We expect to remain inventory constrained as we manage through the remainder of fiscal 2022. We continue to invest in the business, spending $1.8 million on CAPEX in the first quarter of fiscal 2022. This amount is lower than we had planned for the quarter, as we experienced supply chain delays in receiving some machinery. We still anticipate spending approximately $20 million on CAPEX in the fiscal year, as we continue to invest in new retail doors at Salt Life, production processes in our Central American manufacturing facilities, and the continued investments in the infrastructure at DTG2Go. Additionally, we'll continue to invest in IT infrastructure projects that support our vertically integrated supply chain platform. In the first quarter of fiscal 2022, under the previously announced share repurchase program, the company repurchased 74,232 shares for $2.1 million, bringing the total amount repurchased to $54.6 million. At the end of the first quarter, the company had $5.4 million remaining to repurchase under the existing authorization. Now I'll turn the call back over to Bob for his closing comments prior to Q&A.