Delta Apparel, Inc.

Thank you and good afternoon to everyone participating in Delta Apparel's fiscal year 2023 first quarter earnings conference call. Joining us for management are Bob Humphreys, Chairman and Chief Executive Officer, Justin Groh, Executive Vice President and Chief Administrative Officer, and Nancy Bubinich, Chief Accounting Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, projections or other forward-looking statements may be made by Delta Apparel's executives. Such projections and statements suggest prediction and involve risks and uncertainty, and actual results may differ materially. Please refer to periodic reports filed with Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. 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. It's now my pleasure to turn the call over to Mr. Humphreys. Please go ahead.

Good afternoon, and thank you for your interest in Delta Apparel. Before we begin, I'd like to briefly introduce Justin Groh and Nancy Bubenich to those of you on the call. Justin recently rejoined Delta Apparel as our Executive Vice President and Chief Administrative Officer and has been with us for almost a decade in various roles, including General Counsel and Vice President of Administration. Among the multiple hats Justin wears for the company, he is heading up our investor relations efforts. Nancy has been with the company since 2006 and has held a variety of accounting and financial leadership roles during that time. Since 2021, Nancy has served as our Chief Accounting Officer and was recently appointed to serve as our Principal Financial Officer. Nancy has a deep understanding of our financial affairs, including our manufacturing costing and inventory valuation systems. Additionally, Nancy has arranged and managed our offshore financing for years, And recently, she added an additional lender to support our investments in El Salvador. This past year, she arranged capital lease financing for our Salt Life retail store build outs. She also manages our relationship with Wells Fargo and the other lenders in our U.S. revolving debt facility. As you can see, Nancy has been quite busy. I'm very excited to have Justin and Nancy with us on the call today. Now turning over to our results for the first quarter of our 2023 fiscal year, we are extremely pleased to report double-digit sales growth across four of our five go-to-market channels, including DTG2Go, Saltlight, Global Brands, and Retail Direct. These strong top-line results were led by a record quarter in our on-demand digital print business, DTG2Go, including nearly 20% sales growth year-over-year. Our Salt Life business also brought in record sales for the quarter with 17% growth over the prior year. Our top line performance for the quarter provides a great example of the resiliency that we've been able to build into our business over the years with a strength in the majority of our go-to-market channels, allowing us to overcome some of the demand headwinds in the mass retail channel impacting our Delta Direct channel and the overall industry for several quarters now. Our top-line performance also reflects the resiliency of our team of 8,500 associates across four countries and its ability to execute our strategies, serve our customers, and navigate what remains a fluid macroeconomic and retail environment. As expected, our profitability this quarter was impacted by the reduced demand in the mass retail supply chain as well as the elevated costs we continue to see in our business, particularly in our Delta Group segment with respect to cotton and other raw materials, as well as energy and labor. Although cotton prices have somewhat normalized from the unusual highs of last year, that high-cost cotton is now flowing through our cost of sales and pressured our bottom line results this quarter. The manufacturing shutdowns that we and many across the industry initiated during the quarter to calibrate output with a lower demand also impacted profitability. We expect to continue to work through last year's higher price cotton in our second quarter and begin to see the benefits of lower input costs in our financial results as we progress through the back half of our fiscal year. Let me now turn the discussion over to Justin, who will go through our business highlights in more detail, and then to Nancy, who will follow up with a review of our financial results. I'll then join with them to open the call up for questions. Justin.

Thanks, Bob. As Bob mentioned, we were pleased to deliver solid top-line performance this quarter, with net sales of $107.3 million that were down only slightly to our record first quarter sales last year of $110 million, in what was a markedly different demand environment for Basic Tees compared to last year, when the industry generally couldn't make enough product quickly enough to satisfy market demand. In our Delta Group segment, the DTG2Go team executed well during the holiday season and posted record first quarter sales, including strong double-digit growth over last year and increased average selling prices. Customers continue to appreciate the lower inventory investment and better inventory risk management, quicker time from order to porch, more efficient replenishment, small order, and quick activation programs, and unlimited color and design options that DTG2Go's digital print strategies offer. In addition, DTG2Go continues to leverage the competitive advantages provided by its multi-facility fulfillment network and internal source for blank garments. Its ability to reach 99% of U.S. consumers in two days or less and access Delta Direct's low-cost blank tea and flea supply are true market differentiators, and DTG2Go's margins and profitability should benefit from increases in customer adoptions of Delta Direct garments going forward. Demand for DTG2Go's digital first strategy continues to exceed current capacity, and we are steadily improving our output on new technology that we were the first to implement in a full production environment only 15 months ago. We expect the learning and expertise gained during this early operational phase to solidify DTG2Go's position as not only the largest, but also the highest quality digital first printer in our market. In addition, DTG2Go's business with traditional e-retailer and other customers utilizing previously implemented technology continues to grow significantly. We remain extraordinarily bullish on the long-range penetration of digital strategies across the printware industry, which some experts predict this year to reach 3% of an overall market estimated at well over $20 billion and to increase to 6% of a much larger overall market by 2028. DTG2Go's first mover advantages and industry-leading position set the stage for what we believe should be many years of strong double-digit top-line growth while targeting consistent operating margins in the low teens. Although DTG2Go provided record output and much improved service to our customers in the important holiday season, we still have challenges ahead of us to further improve machine efficiencies, reduce maintenance expense, and reduce labor and supply costs. We have an experienced team driving these improvement initiatives and expect to start achieving our targeted costs during our fourth fiscal quarter. Our global brands channel also delivered double digit sales growth for the quarter and continues to serve as a valuable supply chain partner to large multinational and regional brands, major branded sportswear companies, and all branches of the United States Armed Forces. The growth in that channel was accelerated by the expansion of business with new customers. We saw the same dynamics during the first quarter in our retail direct channel, where we provide retail-ready products directly to sporting goods and outdoor retailers, farm and fleet stores, department stores, and mid-tier and mass retailers. This channel also posted double-digit first quarter growth and continues to expand its customer base across both brick-and-mortar and e-commerce retailers, many of whom are benefiting from a recent shift in consumer focus toward products with price points in the range of those we offer. Our team has worked extremely hard over the years to build a world class platform that meets the high service levels and compliance sophistication required to do business with the world leading brands and retailers. It is rewarding to see these big players in our industry put more emphasis on near shore sourcing strategies like those we offer in Central America and validate the investments we've made in the region. With these global sourcing strategy tailwinds, our vertical manufacturing, including DTG2Go's digital print offering, and what we estimate to be an addressable activewear market in the United States ranging from $8 billion to $10 billion and growing, we believe our global brands and retail direct channels are positioned to generate further growth opportunities across our Delta Group segments. In our Delta Direct channel, we saw the lower demand we expected within our retail licensing customer base that sells through to mass market retailers, which drove lower revenue in the channel. We continue to see indications of an over-inventory environment in this channel and expect demand to improve as these higher inventory levels gradually work down throughout the year. In the meantime, we remain proactive in managing our manufacturing output to align inventories with market conditions. We idled our manufacturing facilities in Central America for an additional three weeks during the quarter and also operated several of them at less than full capacity and initiated related workforce reductions. Although these production curtailments come with associated expenses and margin impacts, which Nancy will touch on more in a moment, we plan to continue to leverage the flexibility we have in our vertical platform until we see better equilibrium between inventories and demand. We'll also focus on opportunities in higher margin areas, such as our ad specialty and promotional channel, where we offer customers a one-stop shop for our Delta and Sophie products, along with a selection of golf apparel, outerwear, workwear, hats, bags, and accessories from other select brands. Shifting gears to our Salt Life group segment, the Salt Life team delivered record sales along with excellent bottom line performance for the quarter. The strong top-line performance included over 25% growth across SaltLife's direct-to-consumer retail and e-commerce channels, as well as strong double-digit growth within its wholesale customer base. SaltLife continues to add significant new wholesale customers, and its products are now sold in approximately 1,800 retail doors across 48 states and internationally. As Bob indicated in our press release, the Salt Life business truly hit on all cylinders this quarter and is off to a strong start as it moves into its spring selling season. The momentum in Salt Life's direct-to-consumer channels is particularly notable, and the team deserves kudos for not only building out brick-and-mortar retail and digital footprints to keep pace with its growing consumer base across the country, but doing so in a profitable manner. Salt Life currently operates 21 branded retail doors spanning Florida, Georgia, South Carolina, Texas, California, Alabama, and Delaware, and is targeting six to eight new openings this fiscal year, including first locations in New Jersey and Virginia, as well as three new full-price stores and one outlet store in the Florida market. These retail locations are highly productive boxes, typically averaging around $500 in sales per square foot and generating four-wall profit in their first year of operation. On the e-commerce side of Salt Life's direct-to-consumer business, the saltlife.com website now ships to all 50 states, including standard order flows to Midwest and Western states outside of the brand's traditional southeastern strongholds. Moreover, sales on the site during the quarter were up almost 24% over the prior year, with site traffic, order counts, and average order value all up significantly over the prior year. We expect our Salt Life e-commerce business to continue to grow and, importantly, to grow profitably. From a macro viewpoint, the Salt Life brand is clearly resonating with consumers and benefiting from the myriad of marketing initiatives the Salt Life team is advancing. including steadily growing the followings across YouTube and social channels like Instagram, as well as the brand's proprietary online content portal, The Daily Salt, and podcast, Above and Below. We continue to see a tremendous runway for growth for Salt Life across the U.S. and internationally, accompanied by operating margins in the mid-teens. Let me now pass it over to Nancy for an overview of our financial results.