Delta Apparel, Inc.

Thank you, and good afternoon to everyone participating in Delta Apparel Inc.' 's Fiscal Year 2023 Third Quarter Earnings Conference Call. Joining us for management are Bab Humphries, Chairman and Chief Executive Officer, Justin Groh, Executive Vice President and Chief Administrative Officer, and Nancy Bibanik, Vice President and 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 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 update or revise any forward-looking statements, even it becomes apparent that any projected results will not be realized. I'll now turn the call over to Mr. Humphries. Please go ahead.

Good afternoon and thank you for joining us today and for your interest in Delta Apparel. Before we begin with a review of our third quarter results, I want to once again thank our teams throughout Mexico, Honduras, El Salvador, and the United States. I'm extremely proud of the way they have executed on a host of cost, inventory, and debt reduction strategies that have been very meaningful to our business and helped us navigate through an extremely challenging operating environment over the last several quarters. Their unwavering commitment to meeting the needs of our customers day in and day out is amazing. Looking at our third quarter results, as expected, parts of our business continue to be impacted by the well-publicized right-sizing of inventory levels across the retail supply chain, and our overall sales were down relative to last year's record buying activity in seller's market across the activewear industry. However, we were encouraged to see some preliminary signs that demand in the active wear market has begun to stabilize, enabling us to run our manufacturing plants closer to run rate capacities in setting the stage for improved operating performance in the fourth quarter and into fiscal 2024. I am pleased to report that we continue to see steady progress towards a more normalized cost environment for our business and we were able to work through much of the trailing impacts of last year's historically high-priced cotton flowing through our inventory and cost to sales during the quarter. Our decision towards the end of last year to curtail production levels to match the lighter industry demand and to purchase less cotton at what were heavily inflated prices proved to be strategically sound and has put us in what we believe is a solid competitive position moving forward. However, it is hard to overstate the impacts of the high-priced cotton and the muted buying activity across the activewear industry has had on our operating results. We believe it is essential to isolate these two unique impacts on our business in order to properly understand our operating results both this quarter and year-to-date as well as our positioning for sustainable improved performance going forward. In addition to the obvious margin pressure from a key raw material input like cotton escalating almost 100% above this historical averages, reduced production levels in our vertical manufacturing platform carry significant non-cash impacts from unabsorbed fixed overhead expenses, as well as significant cash costs from severance and temporary unemployment benefit payments required in the offshore jurisdictions that we operate. Without these unique cost drivers, our results for the third quarter and for the first nine months of our fiscal year resemble the solid operating performance we achieved in recent years. For example, our gross margins for the quarter were 13.1%, but adjusted for the cost impacts of these events, our gross margins were approximately 22%. Similarly, we reported an operating loss of $4.5 million for the quarter, but adjusted for the cost impacts of these events, we achieved operating income of approximately $5.5 million. The good news is that we see both of these unique trends diminishing, although we do expect some expense impacts from them in our fourth quarter results and in the first quarter of our next fiscal year as these expenses roll through cost of sales. In addition, Our decisive action to calibrate our production levels and moderate our inventory build, we also initiated a variety of strategic actions to better optimize our overall cost structure, including the transition of our more expensive production capacity in Mexico, where we have to purchase third-party textile fabric. Our lower cost Central America platform, served by our own textile manufacturing operations, will absorb this production. This transaction requires significant reductions in our offshore manufacturing workforce and associated severance payments benefits. We also consolidated the digital print capacity at a legacy facility that we assumed by an acquisition into our national footprint of hybrid print and distribution facilities. We estimate annual run rate cost savings of up to $6 million from these restructuring activities once fully implemented, but they also carried some significant one-time costs that impacted our year-to-date results, and we expect some additional one-time costs to complete certain initiatives in our fourth quarter. Nancy will now provide more detail on our reported and adjusted results in a moment, but let me now turn our call over to Justin to walk you through our business highlights in more detail. I'll join them at the end of the call in opening up for questions. Justin?

Thanks, Bob. As Bob mentioned, our teams have admirably executed on a variety of cost, inventory, and debt reduction strategies intended to counteract the challenging operating environment we've seen in recent periods, and their hard work is evident in our third quarter results. We ended the quarter with an approximately 13% reduction in our inventory from only six months ago in December, and expect further reductions as we move through the fourth quarter that should position us to enter the new fiscal year with appropriately balanced inventories. We also ended the quarter with a significant reduction in our long-term debt, which was down 15% from our most recent high, and expect to reduce debt further in our fourth quarter. The cost structure optimization initiatives Bob mentioned, along with our very disciplined spending, including less than $2 million in capital expenditures during the quarter, drove a 16% year-over-year decrease in SG&A expenses for the quarter. Now turning to our individual business units. Our Salt Life business continues to expand its direct-to-consumer footprint, recently opening its first two retail stores in New York and its 24th and 25th locations across the country. We now operate four Salt Life stores in the Northeast market, including our Rehoboth Beach, Delaware store opened last year and our recently opened location in Long Branch, New Jersey, and see a tremendous runway for growth there. Salt Life's branded retail footprint now extends across nine states, including California, Texas, Alabama, Georgia, Florida, South Carolina, Delaware, New Jersey, and now New York. Same-store sales for the quarter among our stores opened at least a full year, decreased approximately 3.5%, with the drop due to lower travel to the heavy tourist destinations where we target our retail strategy, as well as the suboptimal spring and summer weather conditions in these areas. Our key retail performance metrics, such as conversion rate, are generally holding steady, and we look for our same-store sales to return to growth when customer foot traffic picks up. Salt Life e-commerce sales continued their strong trajectory during the quarter, with over 100% sales growth versus the prior year. In addition, we saw significant double-digit growth in key e-commerce performance metrics, such as site traffic, conversion rate, average order value, and units per transaction. Along with Salt Life's growing licensed royalty revenue stream, which includes a new home furnishing partnership that we are extremely excited about, the e-commerce channel remains one of the most profitable distribution channels across our entire business. The e-commerce channel also continues to give us great visibility into the Salt Life brand's geographic appeal, which is extremely valuable in planning future retail site locations. Our new retail locations in the Northeast market are an excellent example of our data-driven approach to site selection. In recent years, the e-commerce purchasing activity in New Jersey and New York was consistently among the most active on our saltlife.com site, and we look for these store openings to contribute to a market halo effect, further driving e-commerce traffic among those visiting these high tourist traffic areas. As we noted on our last call, we expected the inventory overhang across the retail landscape and the ongoing U.S. consumer uncertainty to impact Salt Life's wholesale channel during the quarter, which they ultimately did. Much like our branded retail footprint, many of our wholesale accounts were also impacted by lower domestic travel activity in the late spring and early summer, particularly Salt Life's dealer base and heavier tourist destinations. All of these factors, coupled with last year's supply chain delays, concentrating more shipments and sales in the third quarter, created a challenging third quarter wholesale comp for the Salt Life business. However, for the full year, we anticipate overall sales growth at Salt Life and continued sales growth going forward. As a final note on the Salt Life business, we were very pleased to see the brand recently featured in the New York Times. The work the team has done to grow this powerful lifestyle brand across the United States and internationally and to do so profitably is something we are extremely proud of. Turning to our DTG2Go business, the team continued to make significant progress on a variety of production efficiency and quality initiatives during the quarter. We completed our goal of standardizing the operating software, ink, and humidification systems across our entire fleet of Polaris Digital First equipment. This initiative resulted in some necessary downtime and reduced capacity across the locations in our network where we operate this higher print quality equipment, but the consistency and quality gains coming out of this effort should significantly enhance our operating advantages and our go-forward service platform for our Digital First customer base. Our initiative to improve the within spec production rates on our Polaris equipment also progressed well during the quarter, and we continue to achieve record on quality rates on the cornete equipment we use outside of our digital first customer base. The increasing usage of our delta direct blanks by our customer base, which is now on a path for acceleration as we develop more proprietary fabrics and products optimized for digital printing, and the consistency advantages they bring compared to third-party garments are key drivers of our improvement in this area. Our recent initiative to concentrate our digital-first strategies primarily on high-usage product sizes and colors has been successful in achieving our consumer satisfaction targets to date. We now serve Digital First customers from three of our seven locations across the United States and are working towards reengaging a fourth location and reincorporating additional sizes and colors into our service offering as we move closer to the holiday season. We also intend to expand the usage rate on our fleece, youth, and big and tall products within our Digital First customer base going forward. Looking at our Digital First strategy from a broader perspective, The DTG2Go team's efforts over the last two years to incorporate an entire fleet of state-of-the-art printing technology, which we believe to be the largest and most advanced of its kind in the market, across multiple locations to serve a make-to-order customer base with the highest quality requirements in the industry, and to advance all of the operational and technical initiatives inherent in a strategy of that magnitude, have been exemplary. The scaled multi-technology solutions DTG2Go now offers provided with another unique competitive advantage in the market, as well as another driver in attracting more players across the decorated apparel space to digital, including more retailers, brands, and content companies. ETG2Go also reached an exciting milestone during the quarter by going live with a new proprietary online portal designed to facilitate customer orders for quick turnaround, lower unit volumes not suited for traditional screen print and decoration platforms. The new portal allows our wholesale customers to simply log in, upload an image file, and select desired colors and sizes, which can take only a matter of minutes. From there, DTG2Go does all of the work and delivers within two to three days. We believe our portal solution is tailor-made for the ad specialty and promotional markets, which is a huge and somewhat untapped market for DTG2Go. as well as small and mid-sized customers who do not have enough volume to devote resources to build a dedicated API with DTG2Go, as our larger customers do. The new portal is also ideal for traditional screen printers who have orders that they either can't fulfill due to time constraints or don't want to fulfill due to lack of profitability on smaller orders. We anticipate substantial near-term demand creation opportunities among these groups and plan to devote marketing resources to this area in the near term. More broadly, we believe the portal can be another accelerating factor for industry migration to digital print, fueling our overall growth and market share gains. From a macro perspective, we continue to strongly believe that the multi-billion-dollar decorated apparel market will gravitate to the speed to consumer, SKU customization, inventory efficiency, and other benefits of on-demand digital. DTG2Go, with its unique advantages including market leading print capacity, a nationwide fulfillment network, proprietary technology and processes developed over 15 years in the digital space, and vertical blank supply through Delta Direct, is best positioned to capitalize on this digital disruption trend. Given these dynamics and DTG2Go's recent productivity gains and solidifying operating picture, We expect a healthy double-digit sales growth trend and improved profitability at DTG2Go in fiscal year 2024. Now turning to our activewear business, which as a reminder, is organized around three key go-to-market channels. Delta Direct, which provides primarily blank garments to the screen print, promotional, and e-retailer markets, as well as retail licensing customers that sell into mass retail supply chains. Global Brands, which provides custom decorated retail floor-ready activewear to major brands, sportswear players, and the U.S. military, and Retail Direct, which provides decorated apparel to brick-and-mortar and online retailers. This business has experienced the vast majority of the impacts over the last several quarters from the cotton pricing and production curtailment trend Bob referenced earlier, primarily because it houses our entire vertical manufacturing platform outside of DTG2Go's digital print fulfillment network. and serves the channels hit hardest by the over-inventory environment among mass and mid-tier retailers. However, as Bob indicated, we are now in an improving cost environment, and our activewear business's vertical manufacturing platform is running at levels much closer to capacity. We are encouraged to see more signs that demand in the activewear market, including the retail licensing channel, may be stabilizing. With our decision last year to minimize our purchases of the high-cost cotton and more quickly get to the point where we are now, steadily seeing more normalized cotton costs in our inventory, we believe our activewear business is well-positioned to take advantage of market improvements and close out our fourth quarter and move into fiscal year 2024 with steadily improving operating performance. Let me now pass it over to Nancy for a review of our financial results.