Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the Company. We may from time
to time make written or oral statements that are "forward-looking," including
statements contained in this report and other filings with the SEC, in our press
releases, and in other reports to our shareholders. All statements, other than
statements of historical fact, which address activities, events or developments
that we expect or anticipate will or may occur in the future are forward-looking
statements. The words "plan", "estimate", "project", "forecast", "outlook",
"anticipate", "expect", "intend", "remain", "seek", "believe", "may", "should"
and similar expressions, and discussions of strategy or intentions, are intended
to identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future
performance. Instead, they are based on our current expectations and are
necessarily dependent upon assumptions, estimates and data that we believe are
reasonable and accurate but may be incorrect, incomplete or imprecise.
Forward-looking statements are subject to a number of business risks and
inherent uncertainties, any of which could cause actual results to differ
materially from those set forth in or implied by the forward-looking statements.
Therefore, you should not rely on any of these forward-looking statements.
Important factors that could cause our actual results and financial condition to
differ materially from those indicated in forward-looking statements include,
among others, the following:
? the general U.S. and international economic conditions;
? the impact of the COVID-19 pandemic and government/social actions taken to
contain its spread on our operations, financial condition, liquidity, and
capital investments, including recent labor shortages, inventory constraints,
and supply chain disruptions;
? significant interruptions or disruptions within our manufacturing,
distribution or other operations;
? deterioration in the financial condition of our customers and suppliers and
changes in the operations and strategies of our customers and suppliers;
? the volatility and uncertainty of cotton and other raw material prices and
availability;
? the competitive conditions in the apparel industry;
? our ability to predict or react to changing consumer preferences or trends;
? our ability to successfully open and operate new retail stores in a timely and
cost-effective manner;
? the ability to grow, achieve synergies and realize the expected profitability
of acquisitions;
? changes in economic, political or social stability at our offshore locations
in areas in which we, or our suppliers or vendors, operate;
? our ability to attract and retain key management;
? the volatility and uncertainty of energy, fuel and related costs;
? material disruptions in our information systems related to our business
operations;
? compromises of our data security;
? significant changes in our effective tax rate;
? significant litigation in either domestic or international jurisdictions;
? recalls, claims and negative publicity associated with product liability
issues;
? the ability to protect our trademarks and other intellectual property;
? changes in international trade regulations;
? our ability to comply with trade regulations;
? changes in employment laws or regulations or our relationship with employees;
? negative publicity resulting from violations of manufacturing standards or
labor laws or unethical business practices by our suppliers and independent
contractors;
? the inability of suppliers or other third-parties, including those related to
transportation, to fulfill the terms of their contracts with us;
? restrictions on our ability to borrow capital or service our indebtedness;
? interest rate fluctuations increasing our obligations under our variable rate
indebtedness;
? the ability to raise additional capital;
? the impairment of acquired intangible assets;
? foreign currency exchange rate fluctuations;
? the illiquidity of our shares; and
? price volatility in our shares and the general volatility of the stock market.
A detailed discussion of significant risk factors that have the potential to
cause actual results to differ materially from our expectations is set forth in
Part 1 under the subheading "Risk Factors" in our Annual Report on Form 10-K for
fiscal 2021, filed with the SEC. Any forward-looking statements in this
Quarterly Report on Form 10-Q do not purport to be predictions of future events
or circumstances and may not be realized. Further, any forward-looking
statements are made only as of the date of this Quarterly Report on Form 10-Q,
and we do not undertake to publicly update or revise the forward-looking
statements, except as required by the federal securities laws.
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Business Outlook
The results of our third quarter fiscal 2022 reflect a continuation of the solid
performance we achieved in the first half of fiscal 2022, which we believe has
been driven by strong consumer demand for our products. While sales continue to
grow year over year, our operating margin was negatively impacted by
inflationary pressures, resulting in higher variable selling and distribution
costs and lower operating margins. Our bottom line results achieved diluted
earnings per share of $0.88 for the third quarter.
Our five focused go-to-market strategies and our vertical manufacturing supply
chain are driving growth across all the channels we serve. Our Delta Group
segment saw 3% sales growth over the prior year across our diversified channels
of distribution and as a result of providing additional value-added services.
Driven in large part by increased customer demand, our Activewear business,
comprised of Delta Direct and Global Brands & Retail Direct business, saw sales
increase over the prior year third quarter. Our digital print business, DTG2Go,
also saw sales growth during the third quarter of fiscal 2022.
The Salt Life segment exceeded the prior year third quarter with sales
increasing by 30%. Our wholesale channel continued to demonstrate strength, and
the Salt Life branded retail footprint was further expanded with the opening of
new locations in Foley, Alabama; Hilton Head, South Carolina; Boca Raton,
Florida; and Rehoboth Beach, Delaware, bringing the number of retail doors to
20 locations across seven states. Our recent Salt Life retail store openings
have continued to validate the strength of the Salt Life brand and our
go-to-market strategy.
Results of Operations
Financial results included herein have been presented on a generally accepted
accounting principles ("GAAP") basis and, in certain limited instances, we have
presented our financial results on a GAAP and non-GAAP ("adjusted") basis, which
is further described in the sections entitled "Non-GAAP Financial Measures."
Net sales were $126.9 million in the third quarter of fiscal 2022, an increase
of 7% compared to the prior year third quarter net sales of $118.7 million.
Net sales in the Delta Group segment grew 3% to $106.0 million in the third
quarter of fiscal 2022 compared to $102.6 million in the prior year third
quarter. Delta Direct, Retail Direct and Global Brands grew 3% from prior year.
Net sales for the first nine months of 2022 were $323.3 million, a 14% increase
over the prior year.
The Salt Life Group segment third quarter fiscal 2022 revenue grew 30% to $20.9
million compared to $16.1 million in the prior year third quarter. The segment's
growth was primarily driven by growth in our wholesale channel and retail
stores. For the first nine months of 2022, net sales were $46.0 million, up over
$8.4 million from the prior year net sales of $37.6 million.
Gross margins were 24.2% for the third quarter of fiscal 2022, declining 130
basis points from the prior year third quarter gross margin of 25.5%.
The Delta Group segment gross margins were 19.1% for the third quarter of fiscal
2022, a decline of 260 basis points from the prior year third quarter margins of
21.7%. Gross margins were primarily impacted by increased input costs. Margins
for the first nine months of fiscal 2022 declined from 20.2% in prior year to
19.6% of sales in the current year.
The Salt Life Group segment gross margins improved to 50.2% in the third quarter
of fiscal 2022, an improvement of 50 basis points compared to 49.7% in the prior
year third quarter resulting from a favorable mix of sales, including increased
Salt Life branded retail store sales. For the first nine months of fiscal year
2022, gross margins grew to 51.6% of sales from 47.9% in prior year.
Selling, general, and administrative expenses ("SG&A") were $22.4 million in the
third quarter of fiscal 2022, or 17.7% of sales, compared to $19.9 million,
16.8% of sales, in the prior year third quarter. The increase in SG&A expenses
of $2.5 million compared to prior year third quarter was primarily driven by
higher variable selling and distribution costs. SG&A expenses for the first nine
months of 2022 were $59.6 million, or 16.1% of sales, compared to $53.0 million,
or 16.5% of sales, in the prior year.
Other income for the 2022 and 2021 third fiscal quarters includes profits
related to our Green Valley Industrial Park equity method investment. Other
income for the third fiscal quarter of 2022 also includes a valuation change in
our contingent consideration liabilities of $0.8 million. The first nine months
of 2022 other income was $1.9 million, including profits related to our Green
Valley Industrial Park equity method investment and a valuation adjustment to
our contingent consideration. Other expense in the first nine months of
2021 include $1.9 million of expenses related to the impact of two hurricanes
that disrupted our Honduran manufacturing facilities in the December 2020
quarter in addition to $0.4 million of long-lived asset impairment charges as
the result of a strategic decision in the June 2021 quarter to exit branded
Soffe retail stores.
Operating profit in the third quarter of fiscal 2022 was $9.3 million. This is a
decrease of 22% over the prior year third fiscal quarter of $11.9 million of
operating profit. For the first nine months of fiscal year 2022, operating
income was $29.5 million.
The Delta Group segment had operating income of $10.7 million in the third
fiscal quarter of 2022, or 10.1% of net sales, compared to $13.9 million, or
13.5% of net sales, in the prior year third quarter. The decrease in operating
profit was driven by declining gross margins. Operating income was $33.6
million, or 10.4% of sales, for the first nine months of fiscal 2022, compared
to $28.4 million, or 10.0% of sales, in the prior year adjusted for $1.3 million
of hurricane-related disruption costs.
The Salt Life Group segment had operating income of $3.6 million in the third
fiscal quarter of 2022, or 17.1% of net sales, compared to $2.9 million, or
18.1% of sales, in the prior year third quarter. The increase in operating
profit was driven by higher sales volume and increased gross margins offset by
higher selling and distribution costs. For the first nine months, operating
income improved by $2.3 million to $7.0 million.
Net interest expense for the third quarters of fiscal year 2022 and 2021 was
$2.0 million and $1.7 million, respectively. Net interest expense for the first
nine months of 2022 was $5.4 million compared to $5.2 million in the prior year
first nine months.
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Our effective tax rate on operations for the nine-month period ended June 2022
was 17.2%. This compares to an effective tax rate of 23.1% for the same period
in the prior year and 21.9 % for the full fiscal year 2021. Changes in the mix
of U.S. taxable income compared to profits in tax-free or lower-tax
jurisdictions have driven this change in our effective tax rate.
Net income attributable to shareholders for the third fiscal quarter of 2022
were $6.2 million, or $0.88 per diluted share, compared to $8.2 million, or
$1.14 per diluted share, in the prior year. Net income attributable to
shareholders for the first nine months of 2022 was $20.0 million, or $2.84 per
diluted share, compared to $13.4 million, or $1.90 per diluted share, in the
prior year.
Accounts receivable were $68.4 million at June 2022, compared to $67.0 million
as of September 2021. Days sales outstanding ("DSO") as of June 2022 were
49 days compared to 47 days at September 2021.
Net inventory as of June 2022 was $227.7 million, an increase of $66.0 million
from September 2021 and $75.4 million from June 2021. The inventory value is
higher than both the prior third quarter and the fiscal year end as a result
of higher input costs impacting materials, transportation and labor combined
with an increase in units on hand.
Total net debt, including capital lease financing and cash on hand, was
$162.4 million at June 2022, an increase of $40.6 million from September 2021.
Cash on hand and availability under our U.S. revolving credit facility totaled
$30.8 million at June 2022, a $14.6 million decrease from September 2021
principally driven by investments in the business to support working capital
needs and increased input costs due to inflationary pressures.
Non-GAAP Financial Measures
We provide all information required in accordance with U.S. GAAP, but we believe
that evaluating our ongoing operating results may be difficult if limited to
reviewing only U.S. GAAP financial measures. In an effort to provide investors
with additional information regarding our results, we also provide non-GAAP
information that management believes is useful to investors. We discuss
operating income, net income and earnings per diluted share performance measures
that are, for comparison purposes, adjusted to eliminate items or results
stemming from discrete events. We do this because management uses these measures
in evaluating our underlying performance on a consistent basis across periods.
We also believe these measures are frequently used by securities analysts,
investors and other interested parties in the evaluation of our ongoing
performance. These non-GAAP measures have imitations as analytical tools, and
securities analysts, investors and other interested parties should not consider
any of these non-GAAP measures in isolation or as a substitute for analysis or
our results as reported under U.S. GAAP. These non-GAAP measures may not be
comparable to similarly titled measures used by other companies.
Liquidity and Capital Resources
Operating Cash Flows
Operating activities resulted in a cash usage of $13.4 million for the nine
months ended June 2022 compared to $11.0 million of cash provided in the prior
year. The decrease in cash provided in operating cash flows in the current year
are due to a build in inventory as a result of increased input costs and
manufacturing output. This was partially offset by increased earnings in the
business and change in timing of payments to suppliers in the current period.
Investing Cash Flows
Cash outflows for capital expenditures were $10.9 million during the first nine
months of 2022 compared to $1.7 million in the same period in the prior year.
During the nine-months ended June 2022, there were $10.4 million of capital
expenditures financed under a capital lease arrangement. We anticipate our
fiscal 2022 capital expenditures, including those financed under capital leases,
to be approximately $20 million for fiscal 2022 and to be focused primarily on
our distribution expansion, digital print equipment, manufacturing equipment,
information technology, and direct-to-consumer investments, including additional
Salt Life retail store openings.
Financing Activities
During the nine months ended June 2022, cash provided by financing activities
was $16.2 million and primarily related to fund our operating activities,
working capital needs, and certain capital investments offset by scheduled loan
principal payments.
Future Liquidity and Capital Resources
See Note F - Debt to the Condensed Consolidated Financial Statements for
discussion of our various financing arrangements, including the terms of our
revolving U.S. credit facility.
Our credit facility, as well as cash flows from operations, are intended to
fund our day-to-day working capital needs, and along with capital lease
financing arrangements, to fund our planned capital expenditures. However, any
material deterioration in our results of operations, may result in the loss of
our ability to borrow under our U.S. revolving credit facility and to issue
letters of credit to suppliers, or may cause the borrowing availability under
that facility to be insufficient for our needs. Availability under our credit
facility is primarily a function of the levels of our accounts receivable and
inventory. A significant deterioration in our accounts receivable or inventory
levels could restrict our ability to borrow additional funds or service our
indebtedness. Additionally, a significant deterioration in our business results
could cause our availability to fall below minimum thresholds, thereby requiring
us to maintain the minimum FCCR specified in our credit agreement, which we may
not be able to maintain. Moreover, our credit facility includes a financial
covenant that if the availability under our credit facility falls below the
amounts specified in our U.S. credit agreement, our fixed charge coverage ratio
(FCCR) for the preceding 12-month period must not be less than 1.0. While our
availability at June 2022 was above the minimum thresholds specified in our
credit agreement, a significant deterioration in our business could cause our
availability to fall below such thresholds, thereby requiring us to maintain the
minimum FCCR specified in our credit agreement.
Share Repurchase Program
In the third quarter of fiscal 2022 under the previously announced share
repurchase program, the Company purchased 33,934 shares for $1.0 million,
bringing the total amount repurchased to $56.4 million during the life of the
program. At the end of the third quarter of fiscal 2022, the Company had $3.6
million of remaining repurchase capacity under its existing authorization.
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our Condensed Consolidated Financial Statements, which were
prepared in accordance with U.S. GAAP. The preparation of our Condensed
Consolidated Financial Statements requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We base our
estimates and judgments on historical experience and various other factors that
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most
significant estimates and assumptions relate to revenue recognition, accounts
receivable and related reserves, inventory and related reserves, the carrying
value of goodwill, and the accounting for income taxes.
A detailed discussion of critical accounting policies is contained in the
Significant Accounting Policies included in Note 2 to the Audited Consolidated
Financial Statements included in our Annual Report on Form 10-K for fiscal 2021,
and there have been no changes in those policies since the filing of that Annual
Report on Form 10-K with the SEC, except as disclosed in Note C-New Accounting
Standards related to the adoption of the cloud computing standard.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local environmental laws and
regulations concerning, among other things, wastewater discharges, storm water
flows, air emissions and solid waste disposal. The labeling, distribution,
importation, marketing, and sale of our products are subject to extensive
regulation by various federal agencies, including the Federal Trade Commission,
Consumer Product Safety Commission and state attorneys general in the United
States. Our international operations are also subject to compliance with the
U.S. Foreign Corrupt Practices Act (the "FCPA") and other anti-bribery laws
applicable to our operations.
The environmental and other regulations applicable to our business are becoming
increasingly stringent, and we incur capital and other expenditures annually to
achieve compliance with these environmental standards and regulations. We
currently do not expect that the amount of expenditures required to comply with
these environmental standards or other regulatory matters will have a material
adverse effect on our operations, financial condition or liquidity. There can be
no assurance, however, that future changes in federal, state, or local
regulations, interpretations of existing regulations or the discovery of
currently unknown problems or conditions will not require substantial additional
expenditures. Similarly, while we believe that we are currently in compliance
with all applicable environmental and other regulatory requirements, the extent
of our liability, if any, for past failures to comply with laws, regulations and
permits applicable to our operations cannot be determined and could have a
material adverse effect on our operations, financial condition and liquidity.
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