Delta Apparel, Inc.

Good afternoon, ladies and gentlemen, and thank you to everyone participating in Delta Apparel's Fiscal Year 2023 Second 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 Bubanich, 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 risk 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 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 accept as required by law The company does not commit to revise or update any forward-looking statements, even if it becomes apparent that any projected results will not be realized. I would now like to turn the call over to Mr. Humphreys. Please go ahead, sir.

Good afternoon, and thank you for joining us today in your interest in Delta Apparel. We are glad to be with you to discuss our second quarter results, which, much like our prior quarter, highlight the resiliency of the Delta Apparel operating model and the diversity of the five distinct market strategies on which we focus. As expected, parts of our business continue to be impacted by the high inventory levels within the mass and other retail supply chains, as well as the generally uncertain economic environment, while other businesses in our portfolio continue to grow at notable rates. Before I take you through a few of our second quarter highlights, I want to recognize our teams throughout Mexico, Honduras, El Salvador, and the United States and thank them for their continuing to meet the needs of our many customers in what remains a challenging overall apparel market. Our success and resiliency as a company are above all a testament to their daily hard work and dedication. Turning to our results for the second quarter of our 2023 fiscal year, we are very pleased to report double-digit growth across three of our five go-to-market channels, including record second quarter top-line and bottom-line performance at Salt Life and year-over-year sales growth of 16%, as well as record sales at DTG2Go and year-over-year growth of 18%. In addition to the exceptional top-line performance at Salt Life and DTG2Go, we achieved double-digit sales growth in our retail direct channel which is an important and growing vertical channel for Delta Apparel, where we provide products directly to brick and mortar and e-commerce merchants, typically either directly or to their retail locations or e-commerce fulfillment centers. Retail Direct is an area of our business, along with our DTG2Go, Salt Life, and Global Brands channels, where we sell decorated, consumer-ready products, either directly to end-users, or to customers close to the retail point of sale, often one layer removed. In addition to decoration services, we often provide other value-adding services, such as retail packaging, hang tagging, and advanced shipping notifications in connection with these sales for which we are paid by the customer. As such, sales of these consumer-ready products typically carry more consistent margins, and they also allow us to better manage cotton and raw material cost risk with pass-through pricing strategies. These products also turn quicker from an inventory perspective, which reduces working capital. We plan to put more emphasis on these consumer-ready channels going forward as we look for ways to optimize our return on the capital we have invested in our business in this higher interest rate environment. Similar to the dynamic we saw in our first quarter of this year, The record top line results at DTG2Go and Salt Life allowed us to offset continuing softness during the quarter in our Delta Direct channel, where we sell primarily blank apparel to customers who decorate the product themselves and sell to a variety of retail supply chains. The retail licensed customer base selling into mid-tier and mass retail continues to be the primary area of softness in our Delta Direct channel, due to the well-publicized high inventory levels and lower demand in that supply chain. We're also seeing some related softness within Delta Direct's regional spring print customer base, but also some growth areas such as the promotional and ad specialty channel. We are seeing a similar over-inventory dynamic in parts of our global brands channel where we provide custom decorated product to large multinational brands and sportswear companies regional brands, and all branches of the United States Armed Forces. The sales and production cycles in this channel are longer and the impacts of the high inventory levels across the industry have, as a result, been delayed and manifested to a degree during the second quarter. We are seeing some nice growth in our military business as well as with several new key branded customers that we look forward to building upon and expanding our business going forward. From an overall perspective, our top line performance for the quarter was somewhat below our expectations due primarily to the depth of the ongoing demand issues in our Delta Direct Channels retail license category. We also anticipated a challenging quarter at the operating level as we continue to work through higher priced inventory units and absorb the impact of our efforts to reduce plant production capacity to align with the softness in the Delta Direct Channel and in the global brands channel to a much lesser degree. These factors significantly impacted our bottom line performance for the quarter, but we believe our decisive action throughout the last three quarters in calibrating production levels and moderating our inventory build have us well positioned to capitalize on upticks in demand and improve our operating results as we move through the second half of our fiscal year. Although we have seen some relatively encouraging signs on the demand front in certain parts of our Delta Direct channel recently, including retail licensing, we remain keenly focused on reducing our inventory position. We achieved an inventory reduction of 6% from December and have initiatives in place to make incremental reductions in the coming quarters. We are realizing the results of these initiatives as we progress through our third quarter. and margins as we cycle through our higher cost inventory through the back half of the fiscal year. We have also taken other strategic actions to better optimize our overall cost structure, including significant reductions in our offshore manufacturing workforce coinciding with our efforts to reduce manufacturing output. This includes reduction in production in our Compeche, Mexico facility to reduce the purchase of source fabrics. In our DTG2Go business, we consolidated the digital production capacity at a legacy single-purpose facility in Clearwater, Florida, into our national footprint of dual-purpose facilities housing DTG2Go digital printing and Delta Direct blank garment distribution under one roof. This further enhances our more efficient on-demand DC model and leverages the unmatched competitive offering provided by our integrated DTG2Go and Delta Direct solution. 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 financial results. I'll then join them at the end of the call to open up for questions. Justin.

Thanks, Bob. Total sales for the quarter were $110.3 million, with three of our five market channels registering double-digit year-over-year growth. including record quarters for both DTG2Go and Salt Life. However, as Bob mentioned, our overall top-line performance came in below our expectations due to the continuing softness in our Delta Direct channel and in our global branch channel to some degree. Our Salt Life Group segment's exceptional performance during the quarter included not only outstanding top-line results, but also gross margin expansion and growth in operating income, driven primarily by a higher mix of direct-to-consumer sales. Salt Life's overall sales growth of 16% was broadly based across all of its distribution channels, including direct-to-consumer retail and e-commerce channels, as well as wholesale, collectively fueling double-digit operating margins. During the quarter, Salt Life opened its 22nd branded retail store in Pembroke Pines, Florida, its 13th store in the Florida market, and just recently opened the brand's 23rd store and first in the state of New Jersey in Long Branch. The New Jersey store and our high-performing store in Rehoboth Beach, Delaware, opened last year are doing well to date in solidifying Salt Life's growing foothold in the Northeast United States. The Salt Life team has plans to further expand the brand's footprint in the Northeast market later this year with its first locations in New York and also plans to open its first location in the Virginia market. We expect to end our fiscal year with approximately 26 Salt Life retail stores in operation. The team has truly done an excellent job of executing on our branded retail strategy. These retail locations are highly productive and typically average around $500 in sales per square foot and generate four-wall profit in their first year of operations. In addition, these stores serve as great brand awareness builders and models for how to best present the Salt Life product line to maximize both the consumer experience and sales at retail. Same-store sales for the quarter in our 16 Salt Life retail stores opened at least a full year, grew approximately 1% over the prior year quarter. Sales on the saltlife.com e-commerce site grew 24% during the quarter. The site remains one of our most profitable distribution channels and a key pillar in Salt Life's direct-to-consumer business, shipping to consumers across the country, including many in the Midwest and western United States outside of Salt Life's traditional southeastern strongholds. The e-commerce channel attracts new customers to the brand and also provides valuable data for future potential retail site locations. We remain encouraged by the continued growth in Salt Life's e-commerce business and see this channel as a key revenue and margin driver for many years to come. Salt Life's wholesale channel, which accounted for 72% of Salt Life's sales last fiscal year, also grew at a healthy clip during the second quarter. The wholesale channel continues to gain new accounts and remains a key growth and customer acquisition driver for the brand, with products sold in approximately 1,800 retail doors across 48 states and some territories outside of the United States. We are seeing some of the well-publicized inventory issues among retailers and general uncertainty among consumers impact accounts in our wholesale channel. And due to last year's supply chain delays in our second quarter pushing more sales into our third quarter, we expect wholesale revenue to come in generally flat to slightly down this quarter. Overall, for the full year at Salt Life, we continue to expect double-digit sales growth in the low teens. We are extremely excited about Salt Life's entry into the multi-billion dollar home furnishings market during the quarter through its new license agreement with Magnuson Home, an industry-leading furniture designer and manufacturer. The new Salt Life home collection will offer consumers across the country a wide array of coastal-inspired products for living, dining, entertainment, office, sleep, and other home spaces, as well as another significant way to connect with the Salt Life lifestyle and brand ethos. We see home goods as a dynamic addition to the current Salt Life license portfolio, including branded restaurants and beverages. As our license portfolio expands over time, we expect the royalty income it generates to serve as another significant revenue channel for Saltline, along with branded retail, e-commerce, and wholesale. Now shifting to our Delta Group segment, the DTG2Go team continued to execute well in posting another strong revenue quarter with year-over-year growth of 18%. DTG2Go continues to be a key sales growth driver for our Delta Group segment, and we remain confident in the value creation potential of this business across all of Delta Apparel. The long-term growth opportunity in digital print becomes more and more evident as the traditional decorated apparel market recognizes the customization of flexibility, speed to customer, and inventory reduction benefits of on-demand digital, which are even more valuable in today's elevated interest rate environments. We continue to leverage our leadership position as both the highest quality and largest digital printer in the markets we serve, as well as the unique advantages we derive from the integration of our digital print operations with our Delta Direct channels network of blank garment distribution locations across the country. Our near-shore vertical supply chain in Central America and custom fabric and product development expertise also give us strategic advantages in creating efficiencies, and cost benefits for both DTG2Go and its customers through the use of internally manufactured Delta Direct blank garments. The DTG2Go team is laser-focused on driving the necessary operational efficiency and quality improvements in the business, and we continue to gain experience scaling up and operating the Polaris printing equipment we recently adopted in four strategic locations across our network. in connection with our goal to deliver the highest level of quality possible in the industry, which we call our Digital First Strategy. We are taking advantage of the relatively lower seasonal demand period in the spring and early summer to standardize our fleet of Digital First equipment and drive better consistency and quality across these four locations. This initiative includes the upgrade and recalibration of the operating software, ink systems, and production processes across the entire Digital First fleet and has been completed in our Phoenix facility with others to follow. Our within-spec production rates on the Cornete equipment we use in channels other than Digital First are currently the best in our history. We are working to match those rates on the Polaris equipment used to meet the higher print quality standards of our Digital First customer base. Printing on purchased garments made outside the Delta Direct platform can be challenging due to the variability of third-party manufacturing processes. So the greater adoption of Delta Blanks by our digital-first customer base over time will positively impact our within-spec production rates. Larger-sized garments, fleece, and certain colors also present challenges on the new equipment. We recently made adjustments to the breadth of product sizes and colors we provide to our digital-first customer base due to quality initiatives implemented to improve consumer satisfaction. We also narrowed the number of locations from which we provide such products as we build process consistency across our Digital First platform. We anticipate reincorporating additional products and locations into our service offering as we ramp up for the holiday season. To further capitalize on the migration to digital print and grow our overall market share, We have developed a business-to-business portal, initially targeting the ad specialty and promotional markets, and expect to launch it sometime in our third quarter. Our new portal will allow customers to easily and seamlessly submit order specifications and associated graphics directly into the DTG2Go digital fulfillment network and take advantage of our on-demand service offering for smaller quantity, quick fulfillment, and replenishment orders that may not be suitable for traditional screen printing. We continue to look for new ways to innovate and expand our digital strategies that leverage our unique combination of vertical integration, fulfillment network scale, and strong customer relationships. Our on-demand fulfillment platform is ideally suited to provide the customized decorated apparel products that consumers want based on their individualized interests. We continue to see meaningful sales and margin growth potential at DTG2Go as we further develop pricing strategies, increase output through productivity gains, and grow sales outside of the holiday season. Our team remains keenly focused on driving these key initiatives across our platform and achieving our operating and cost targets during our fiscal fourth quarter. Moving to our activewear business and its three go-to-market channels. As Bob mentioned, we continue to see growth from new customers in our global brands channel, as well as strength in our military business. But we have experienced some demand softness as brand customers take a more conservative approach to future bookings in the current choppy environment. Sales in our global brands channel were down slightly year over year as a result. Nonetheless, we view that softness as temporal and continue to see a positive trend from the emphasis large brands and retailers are putting on near-shore sourcing strategies like those we offer from our Central America platform. The near-shoring trend was evident during the quarter in our retail direct go-to-market channel, where we provide decorated, full-packaged products to sporting goods and outdoor retailers, farm and fleet stores, department stores, and mid-tier and mass retailers. Our retail direct team delivered another strong quarter of double-digit growth, and we continue to expand our customer base across both brick and mortar and e-commerce players in that channel. We believe our global brands and retail direct channels are positioned to generate significant long-term growth opportunities across our Delta Group segment going forward. These channels both provide many opportunities for us to sell decorated, fully retail-ready products closer to consumers in the commercial flow. As Bob touched on, we plan to continue to place more emphasis on these programs, given that we are paid for the value-added services we provide, and they bring higher margins and inventory turns compared to channels where we provide blank garments earlier in the commercial flow. In our Delta Direct channel, we saw dynamics similar to those we experienced in the first quarter of this year, with sales down approximately 38% year over year. The softness in our retail licensing channel, resulting from mass retailer inventory rightsizing initiatives and a similarly low demand environment in other channels, such as regional spring print, continued, while we saw growth in ad specialty promotion, e-commerce, and specialty retail channels. Given the continuing soft market for blank tees during the quarter, we once again strategically leveraged our vertical manufacturing structure and operated some of our facilities below full capacity while also building in more production shutdown time. These actions significantly impacted our margins and profitability during the quarter, which Nancy will touch on in more detail. But we believe our continuing efforts beginning in the fourth quarter of last year to reduce our overhead structure, level off our finished goods inventory, and match production with demand have been effective and position us to take advantage of opportunities in the market as the year progresses. As Bob mentioned, we are seeing some signs that mass channel demand may be improving, but we will continue to manage the business prudently as higher inventory levels in the channel gradually work down throughout the year. Let me now pass it over to Nancy for an overview of our financial results.