Delta Apparel(US:DLA)2023-05-06 15:01Financial Data and Key Metrics - Net sales for Q2 2023 were $107.3 million, down from $131.7 million in the prior year quarter [23] - Delta Group segment net sales were $91.3 million, compared to $115.3 million in the prior year quarter [24] - Salt Life Group segment net sales were $19 million, representing 16% growth over the prior year [24] - Gross margins were 14.7% overall for the quarter, down from 25.5% in the prior year [29] - Salt Life Group segment gross margins improved to 59% compared to 52.4% in the prior year [30] - Operating loss for Q2 2023 was $5.3 million, compared to operating income of $14.4 million in the prior year [32] - Adjusted EBITDA for the quarter was $2.6 million, down from $18.1 million in the prior year [32] Business Line Data and Key Metrics - DTG2Go posted year-over-year revenue growth of 18% and continues to be a key sales growth driver for the Delta Group segment [13] - Salt Life opened its 22nd and 23rd branded retail stores, with plans to expand further in the Northeast market [17] - The company is developing a business-to-business portal targeting the ad specialty and promotional markets, expected to launch in Q3 [21] - The activewear business experienced demand softness, with sales in the Global Brands channel down slightly year-over-year [19] Market Data and Key Metrics - Salt Life's e-commerce sales grew 24% during the quarter, with the site remaining one of the most profitable distribution channels [104] - The wholesale channel accounted for 72% of Salt Life's sales last fiscal year and continues to gain new accounts [114] - The retail direct channel delivered double-digit growth, with the company expanding its customer base across brick-and-mortar and e-commerce players [115] Company Strategy and Industry Competition - The company is focusing on managing working capital, reducing inventory and debt levels, and deploying capital resources to generate the most positive impact for shareholders [33] - Delta Apparel is leveraging its vertical integration, fulfillment network scale, and strong customer relationships to innovate and expand its digital strategies [18] - The company is placing more emphasis on consumer-ready channels, which carry more consistent margins and allow better management of cotton and raw material cost risk [107] Management Commentary on Operating Environment and Future Outlook - The company expects revenue to get closer to the prior year in subsequent quarters and operating loss to narrow over the next two quarters [3] - Management anticipates the Delta Group will return to profitability either late this year or early next year [47] - The company is encouraged by improving demand, particularly in the basic undecorated tees segment [53] Other Important Information - The company incurred a net loss of $7 million or $1 per diluted share for Q2 2023, compared to net income of $10.1 million or $1.44 per diluted share in the prior year [25] - Interest expense was $3.7 million in the quarter, more than double the prior year second quarter expense of $1.8 million [25] - The company expects to end the fiscal year with approximately 26 Salt Life retail stores in operation [105] Q&A Session Question: How is the company managing gross margin pressures from production curtailments and higher inventory costs? - The company expects sequential improvement in margins as it cycles through higher cost inventory through the back half of the fiscal year [111] Question: What is the outlook for the Delta Group's return to profitability? - Management anticipates the Delta Group will return to profitability either late this year or early next year [47] Question: What is the current internalization rate for DTG2Go, and where is it expected to head over time? - The internalization rate is a little over 50% today, and the company expects it to continue to increase, particularly on the Polaris equipment [73] Question: What are the company's inventory reduction targets? - The company expects to reduce inventory by $25 million further by year-end and continue to bring down inventory levels in units as it progresses through next year [72]